Personal Finance: A benefit to taking some risk

Question: I am a conservative investor and have $100,000 that I will not need for at least 10 years. It is invested in a CD earning 2.1 percent. Is this the right approach, or should I consider corporate bonds?

Answer: "The question is: Are you really a conservative investor, and should you be?" said Newport Beach, Calif., financial planner Laura Tarbox.

After serious losses in the stock market the last few years, Tarbox said, "everyone thinks they are more conservative than they were before, but they have to think about the risks of being overly conservative."

If "conservative" means you cannot stand the chance of losing any money, stay in CDs and U.S. Treasury bonds. But, though the 2.1 percent on your CD will not do much to help build your nest egg, you have to accept it if you must be 100 percent safe.

Virtually any other investment - including corporate bonds - is not completely safe.

If you said you needed your money within five years, I would have said to stick with CDs or individual U.S. Treasury bonds. There is a rule of thumb that you do not take chances with money you will need within five years, ruling out stocks and corporate bonds for short-term investors.

But with 10 years, you can take a few more risks. And when you contemplate risks, think about all of them. Many people do not think about the risk of insisting on ultrasafe investments. Let's say the $100,000 is all you have saved for retirement, and you will have to start living on it when you retire in 10 years.

If your $100,000 stays in a CD earning 2.1 percent, you will have about $120,600. The sum will be less after paying taxes on the interest each year, but let's assume that you keep all the money and that the rate has held at 2.1 percent.

Another rule of thumb holds that you should not remove more than 4 percent of your savings in the first year of retirement to avoid running out of money down the road. That rule also assumes that each year you increase the amount you take out just a little to cover inflation. So, your 4 percent withdrawal from your $120,600 would be $4,822 that first year. If you would have $20,000 in Social Security, you would have $24,822 to live on.

But let's say you will need about $26,200 a year. Then, if you could take on a little more risk - maybe combining CDs, Treasuries, corporate bonds rated "A" or above, and a stock market index mutual fund - and average 5 percent on that diversified portfolio, your $100,000 could grow to about $155,132, with $6,205 withdrawn the first year. Add Social Security, and you'd have your $26,200.

Of course, a 5 percent return is not certain.

Historically, long-term U.S. Treasury bonds have provided a 5.5 percent average annual return, but now the yield is below 4 percent, and if interest rates fall, today's Treasuries could lose value.

Similarly, corporate bonds have averaged about a 5.9 percent return, but they fluctuate with interest rates, too, and can end up as a loser in bankruptcy.

Too, you are aware of the shocks that can rock the stock market, even though it has averaged a 9.6 percent return since before the Great Depression.

Certified financial planners might help you determine your risk level. Try this yourself on Charles Schwab's Web site; go to http://go.philly.com/schwab for an investor profile questionnaire.

For a person willing to take on moderate risk, 50 percent stocks and 50 percent bonds might be appropriate. Significant short-term risks in stocks decline with time. If, for example, you had invested your money all in stocks in 2007 before the market crashed, you would have lost about 37 percent by the end of this June. But with a 50/50 stock/bond split, you would have cut your loss to 13 percent, said Ibbotson Associates.