Remember when putting money in the bank was a quick and easy way to save for retirement? No more. The highest yielding CD’s barely offer more than 1% - savings accounts are that much worse.
Top financial advisor Ric Edelman says as a result, low rates have created a so-called “chase for yield,” which is generating an increased interest in alternative investments that offer higher returns.
Although some higher yielding investments have merit, Edelman feels that too many individual investors are putting money at risk simply because they’re chasing yield.
“They go into things like non-traded REITs, Master Limited Partnerships or MLPs, and fixed annuities,” said Edelman. “When you go into these types of investments you’re taking sizable risk,” and all too often individuals don’t realize it.
Edelman says individual investors are much better served by building a globally diversified portfolio. “I recommend generating income out of that. We call it a systematic withdrawal plan. Allow the growth of the portfolio to substitute for income.”
“And don’t chase yield,” he added. Unless you’re a pro it could end very badly.
Assess your appetite for risk
Looking at another mistake that investors often make, Edelman says, in order to generate return, investors must assume some degree of risk. “A safe investment is simply nowhere to be found. Well you could invest in Treasurys (^TNX) but you won’t generate enough money to retire.”
Instead, he says if you want to live comfortably, a portion of your portfolio has to be in risk assets such as stocks.
“Largely, safe and return are mutually exclusive terms in today’s environment,” he added. “Understand your appetite for risk, and then invest accordingly."
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