One of my favorite sayings is “don’t put all your eggs in one basket.” Usually when I hear that, the “eggs” usually refers to dollars and “basket” usually refers to a particular investment. The rationale behind this saying is that if you put all your money into one investment and that investment fails, you might put all your money at risk. Rather, it suggests, there is safety if you put money into several investments because the likelihood of all your investments failing is low.
When it comes to retirement, I think about baskets a little bit differently. Instead of referring to a basket as a particular investment, I think of baskets as periods of time. Think near term, mid-term and long-term investment assets. For each basket of time, I treat investments differently and would not use the same investment strategy across baskets. Here’s an example of why.
Back in 1998, when I got my first job in the stock brokerage business, internet-based stocks were the craze, and the S&P was headed to new highs. Then in 2000, the market began to drop and kept dropping until 2002, losing approximately 45% of its high from just two years earlier. Imagine retirees at that time! Now they were drawing on retirement savings, and their account value was just above half what it had been two years prior! That’s enough to give a lot of people some serious anxiety! To make matters worse, adjusted for inflation, the S&P did not exceed that high value again until 2013! That’s a long time to slog through retirement in hopes of a recovery.
Source: Inflation-adjusted S&P 500 historical chart- Macrotrends: https://www.macrotrends.net/2324/sp-500-historical-chart-data
But as history shows, the market did recover and has continued its upward trajectory. All that’s needed is time and patience. That’s why it’s important to create different baskets of time to invest money. For money that’s going to be used over the next five years, it really doesn’t make sense to expose it to market risk so other investment strategies should be used. For the next basket, perhaps a small degree of market risk makes sense but not too much. And then with each successive basket, more and more risk can, and probably should, be taken so that investment assets can continue to grow.
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