By Brad Thomason, CPA
Here is a stupid argument: you should not invest in x because you can make more money by investing in y.
Now, I’m betting when you read that sentence, one of two things happened. One possibility is that you nodded your head and thought to yourself, “Yep, I know where he’s going with this.”
Or, you thought, “I don’t know that the argument is stupid, but the fellow doing the writing sure sounds like he is.”
Touché. But let me see if I can persuade you over into Group 1.
The reason it’s a stupid argument is because it inherently pre-supposes that how much money you make, the rate of return, is the basis of the decision, the most important consideration.
It is fair to say, and I will readily concede, that how much money you make will likely never be an unimportant factor. But that doesn’t mean it’s the most important. Not always.
Risk also matters. So does liquidity. There might be some aspect of timing that matters. In a particular case, there might be special factors to take into account. It’s complicated; or at least sometimes it is.
As you approach retirement, it becomes more important to think about shifting your holdings to less risky assets, and ones that have low levels of complexity. You want predictable results, you want low odds of loss and you want it to be easy if someone else has to step in to help you out with managing your affairs. That’s true pretty much in all cases. In the ideal cases, doing so is more palatable because the job of building the wealth to suitable levels is already done at that point.
The fact that you are taking an action which likely diminishes your earnings capacity is easier to live with, because you know you’ve won, and now it’s time to get off the field and use what you have to pay for some remaining years of peaceful existence.
Of course, getting more money is a benefit. But benefits come in other forms, too. That’s why, to simply pretend that the yield is the only thing that matters, is stupid. Because it’s not.
Stock and mutual fund guys have been using this line of argument to beat up on bonds and annuities for years. Don’t do it, they say. You can make more if you leave your money in the market. Dance with who brung ya, and all that.
Perhaps you could. Perhaps. But it isn’t a certainty. Getting what you expect from a bond portfolio is more likely. And getting what you expect from an annuity contract actually is about as certain as it gets, as a matter of law.
Anyway, I’m not going to try to convince anyone that money doesn’t matter and that having more of it isn’t a good thing. But don’t let anyone else convince you that it’s the only thing that matters, ok?
And should they try, you might ought to factor that into your decision about whether to listen them on other topics, as well.
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