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Investing for the future is one of those things that can be difficult. None of us know exactly what the future is and where to put our money. Many more of us know almost nothing about investing and prefer to use seasoned professionals. In the end we are left with little control over the fate of our retirement. Conventional Wisdom: Conventional wisdom says live below your means, invest, and the government will chip in the rest. We get there through education and working hard. For the Baby Boomers this made sense but many are now in trouble as retirement is only a few years off and more than 50% have less than $100,000 in their retirement accounts. During the era of the baby boomers the mentality drew from their parents which typically lived through the Great Depression. During this time there was little employment, difficulty starting businesses and a general feeling that one must save in order to ward off serious poverty. The “rainy day” mentality has never left us. A Changed Economy: The economy is definitely going to change in the next 20-30 years. Some of the changes that are happening are the retirement of a large section of the population which will need to be taken care of (possible bankruptcy of Medicare & Social Security), the rise of oil prices ($4 to $5 a gallon) that will slow the economy down, huge national debt that exceeds our ability to pay for it (without rampant inflation from printing money), and environmental change (lack of water). When the economy changes we will need to change with it. That means society will shift to the owners of production and the workers thereby shrinking the middle class. Thus we will be a rich/poor society that will be dramatically different than it is today. All of the conventional wisdom people have been relying on for years will be wiped away or eat up by inflation. Investing in a New Society: The new society will require a much more sophisticated investor than what was necessary during our parent’s time. Even though the basics of investing are the same such as risk vs. reward, diversification, living below your means, etc. are the same the types of investments and the amount of risk people are willing to make should change. Diversity no longer includes mutual funds only but the mix of investments in stocks, bonds, real estate, business, and others. The more different sectors of the society you invest in the better chance you have of whether declines in the market. For example, real estate may further be invested in vacant land, apartments (income generating), office buildings or houses. Risk is a natural part of getting a return. Generally the higher the risk the more money to be made but also the more likely it is to lose that money. The same can be said for low risk low returns. In today’s market there is some fear that inflation could eat away at one’s gains. Let us say that you are in a fund that pays 6% interest. Not bad? The only problem is that a 2006 inflation rate of 3.5% just left with an increase of 2.5%. Ummm…not very good! If you really wanted a 6% return you would have to make a 9.5% return on all of your investments. If you follow the advice of mutual fund investors there is a good chance you won’t have much when retirement comes. That means you are going to have to take some risk by investing less in blue chips stocks and more in small to medium businesses. The key to avoiding collapse is to diversify your portfolio with a basket of smaller companies and investments that have nothing to do with the stock market (i.e. real estate, businesses, etc.). Murad Ali is a three time published author who writes articles for business. Visit http://www.thenewbusinessworld.blogspot.com
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