Denver Investment FAQ
How do I know which investments to choose in my account?
Time HorizonA huge can of worms, but your investing time horizon is the most important factor in this – in other words, how long will it be until you need the money? If you need the money to use as a down payment on a house in two years, you should be choosing an approximately short-term investment. Another thing we emphasize to clients is that just because you are retired doesn’t mean you have a short time horizon (hopefully). If you are a couple aged 65, there is a high probability that at least one of you will make it into your early 90s (not to mention whatever medical technology will be developed in the next 25 pushing life expectancy even higher). This means that when you retire, you may have 25-35 years to go. This is by all accounts a long investing horizon and that your risk is not just fluctuation of principle (by the stock market going up and down) but the more certain risk is that the price of everything will be 2-3 times what they cost today (e.g. if you plan your retirement around a $40,000 income stream, by the time you pass away 25 years later, that $40,000 will feel like $20,000 based on an assumed inflation rate of 3%).
Purchasing PowerIf someone is 65 years old and in all cash living off the interest (not likely in today’s environment), then he or she can expect that the purchasing power of his savings will be half of what it is today. Because of this, choosing investments is weighing these things. A cash position will nearly certainly (and permanently) lose 50% of its buying power in about 25 years, again based on an assumed inflation rate of 3%.
Bottom LineThe point is that there’s a balance between all of these risks and the way you choose a portfolio should be balancing these.