Friday, September 9, 2011

Misallocation of Funds

Something I was reminded of yesterday is misallocation of funds. In the last few posts we made the assumption that we would be able to get 10% ROR (rate of return) through retirement. That assumption is based on the fact that the S&P averages 10% annual return. We already talked about the flaws of averaging percentages, but I almost forgot to mention time frame.
The reason why the S&P can get an average return of 10% is because we average it over many years. As someone approaches and enters retirement their time frame on that money is not as long as it use to be. When a persons time frame is shorter than 10-15 years their investments need to reflect that. The money that they plan on using in the next few years should be protected.
There are a few options to invest money safely and still average 8%. However, the majority of people will be happy with some sort of annuity giving them 5-6%. The point I'm making is that the investment philosophy of Dave's Ramsey failed in distribution as well. I don't think it is realistic to plan on a consistant ROR of more than 6%. In retirement you often need your rate of return to be consistant.
This topic does depend a lot on the choice of investments. The choices are almost endless. That is why I am a huge proponent of financial education. It is why I am writing this blog.


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