The benefits of beneficiary planning
The benefits of beneficiary planning
Learn the importance of naming a beneficiary on your retirement accounts.
Learn the importance of naming a beneficiary on your retirement accounts.
05/20/2025
INVESTING ESSENTIALS
The risk of avoiding risk
Key points
Stocks vs. inflation
Despite their volatility, stocks historically have outpaced the average annual rate of inflation.
Incorporating risk to achieve goals
If you have ambitious savings goals, taking on investing risk may be one way to achieve those goals.
As an investor, you will probably face risk. Even if you don’t invest at all and simply hold onto your cash, you still face inflation risk—the risk that the rising cost of living through inflation will dilute your buying power.
For instance, if you put aside $1,000 in cash in 1994, 30 years later in 2024, the buying power of that money would have dropped to less than half—just $475 (in 1994 dollars).1 It might make you feel safer to hold onto your cash, but it loses value every day due to the impact of inflation.
A world of risks
Stocks are the most popular types of investments, with 61% of Americans invested in the market through equities.2 Other popular investment options include exchange traded funds (ETFs) and mutual funds.
Despite their popularity, stocks and bonds carry multiple risks.
Among the risks stock owners face:
- Market risk: the risk that the overall market will drop.
- Sector risk: the risk that the industry or market your stock is in will drop.
- Economic risk: the risk that the economy will slump and drag down the stock market.
- Individual stock risk: the risk that your specific stock will drop in value.
- Geographical risk: the risk that the country or region you are invested in will hit hard times driving down the price of stocks in that location.
Fixed-income investments, such as bonds, also carry risks, such as interest-rate risk. If interest rates rise, typically the market value of many fixed-rate bonds tends to drop because investors can buy similar bonds with higher rates, reducing the attractiveness of the older, lower-yielding bonds.
You may be able to minimize interest-rate risk by investing in short-term bonds or notes, but they typically pay a low return, which would open you up to further inflation risk. You might avoid inflation risk by investing in high-yield bonds, but, again, you face interest-rate risk as well as credit risk, which is the risk that the bond may default and become worthless.
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Why risk it?
Investors often choose to take on risk because over time, the rewards of many investments tend to outweigh the risks.
Despite all of its volatility, the S&P 500® index has grown by an average of more than 9.7% per year over the past 50 years (through 2024)4, while 10-year U.S. Treasury bonds have provided an average annual yield of just over 5.9%.5 While past performance may not be indicative of future returns, those historic returns of stocks outpaced the average annual rate of inflation, which has been 3.78% over the past 50 years.6 (The S&P 500 Index is a market-cap weighted index that represents the average performance of a group of 500 large-capitalization stocks.)
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Reaching your goals may require risk
If you have ambitious savings goals, taking on risk may be one way to achieve those goals.
Let’s say you hope to retire 30 years from now, and after calculating your anticipated retirement expenses and factoring in the impact of inflation, you determine you’ll need about $2 million for retirement.
To reach $2 million with no risk and no return on your savings, you would need to save $66,667 per year ($5,556 per month) for 30 years, which could be out of reach for most Americans.
By taking on some investment risk, you may be able to reach your goal while saving significantly less each month.
With a relatively conservative approach to investing that earns a long-term return of 5% per year compounded daily (after expenses), an investment of just $2,500 per month would grow to $2.09 million after 30 years (see graph below).
As the table below shows, more than half of your total of $2.09 million would come from the return on your investment. Your total amount invested during that period would be $900,000 with the remainder, $1.19 million, coming from investment returns.
| Annual return % | Monthly investment | Total 30-year contribution | Investment return ($) | Balance after 30 years |
|---|---|---|---|---|
| Annual return % | Monthly investment | Total 30-year contribution | Investment return ($) | Balance after 30 years |
| 0% | $5,556 | $2,000,000 | 0 | $2,000,000 |
| 5% | $2,500 | $900,000 | $1,193,235 | $2,093,235 |
| 10% | $1,000 | $360,000 | $1,939,140 | $2,299,140 |
Hypothetical example is for illustrative purposes only. It is not intended to represent the performance of any particular security or product, nor does it take into consideration any product expenses, such as fees or sales charges. The results would be reduced if they were included.
Pursuing your goals when investing less
What if you can only afford to save $1,000 a month? As the above table shows, you could reach $2 million in 30 years at $1,000 per month if you can generate an average investment return of 10% per year.
That would mean taking on more risk, but, as mentioned above, the S&P 500 averaged a return of more than 9% per year over the past 50 years. Although you can’t invest directly in an index, you can invest in mutual funds that invest primarily in stocks and, in some cases, may provide returns similar to the performance of the index.
While stocks may be volatile in the short term, the performance of the overall stock market has tended to even out over the long term as the economy moves through its various cycles.
As the above table illustrates, with the 10% annual return example, your $1,000 monthly contributions would add up to $360,000 during the 30-year period, while your investment return would total $1.94 million—more than five times the dollar amount you invested—to reach the $2.3 million total balance.
The monthly amount you invest and the investment choices you make—whether your portfolio is mostly stocks (or stock funds), bonds (or bond funds) or a diversified mix of both—should be based on your own means, goals and threshold for risk. But remember, avoiding one type of risk may mean facing another, including the risk of failing to reach your retirement goals.
The concepts presented are intended for educational purposes only. This information should not be considered investment advice or a recommendation of any particular security, strategy, or product.
1 Dollar Times calculator, www.dollartimes.com (Dec. 13, 2024).
2 Gallup, “What Percentage of Americans Own Stock?” May 24, 2023 (Jan. 13, 2025)
4 Microtrends, “S&P 500 Historic Annual Returns,” www.microtrends.net, (Jan. 13, 2025).
5 Macrotrends, “10 Year Treasury Rate – 54 Year Historical Chart” (Jan. 2, 2025).
6 Investopedia, “Historical U.S. Inflation Rate by Year: 1929 to 2024,” (January 13, 2025).
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