As people get closer to retirement they sometimes become more wary of risk, fearing that their investments may lose value right when they need it most.
But what about investments with zero volatility–or no risk. Is there such a thing?
Not exactly. You may think that putting your money in a savings account is a “risk-free” investment. After all, you’re getting some interest on your money and if your bank is FDIC-insured, the FDIC insures up to $250,000 per depositor per product category (e.g. deposit account, which includes savings accounts, is considered a category).
But your savings account may not protect you against inflation. And that could potentially put your savings at risk.
Savings accounts and inflation
With today’s interest rates, storing your money in a savings account won’t protect you from inflation.
Let’s assume you have $100 in a savings account that pays a 1% interest rate (pretty standard these days). After one year, you’ll have $101.
Meanwhile, the inflation rate in the U.S. is projected to hit 2%. That means you’ll need $102 to compensate for the higher prices of goods and services.
So what does that mean? With only $101 in your account, you will have actually lost some purchasing power by keeping your money in that low-interest savings account.
Inflation is a complicated thing. While some inflation is necessary to spur the economy as a whole, the effect is always the same for the individual consumer: your money is worth less.
Volatility is normal
If you’re searching for a “zero-volatility” investment, you may want to rethink what you’re looking for. After all, volatility doesn’t mean you’ll lose money. It’s just a description of what happens in the market.
Investing money in the market comes with risk. And that’s okay. The market is going to experience peaks and valleys. There will be great years, and there are going to be, well, not so great years. Volatility, or storms in the market, are to be expected.
In short, the question isn’t about searching for that magical investment that will never go up for down. It’s about creating a solid financial strategy that includes saving as well as investing in a diversified portfolio.
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