Retirement Investing Dilemma - Should You Own Stocks, Bonds or Cash?

Most retired people and those about about to retire are concerned with making safe investments that will grow and produce income over time. Safety should be your primary concern because if you lose money on your investments, you cannot replace the lost dollars with new money from salaries, bonuses and wages.

The dilemma is how much you should invest in stock, bonds and cash. Stocks can give you the largest gains but if you pick the wrong ones or the market goes south, you can lose lots of money. Bonds are safe if you hold them to maturity and cash in the form of certificates of deposits (CDs) is always safe. But bonds and cash do not return the high rates that stocks can.

Determine Your Mix of Stocks, Bonds and Cash

Before you make your individual stock, bond and CD selections, you need to determine the overall mix (asset allocation) of stocks, bonds and cash that you want to own. The following table includes the dollar value after 10 years of a $100,000 investment for different mixes of stocks and cash. The returns assume the cash was in certificates of deposits with a 5% interest rate each year for the ten years. Use the table to study the effect of different allocations between stocks and cash.

Portfolio Value After 10 Years - CD Rate 5%


Stock Market Return




100% Stock

$43,439 $100,000 $215,892

80% Stock/20% CD

$67,329 $112,578 $205,291

50% Stock/50% CD

$103,164 $131,445 $189,390

20% Stock/80% CD

$146,653 $150,312 $173,490

100% CD

$162,889 $162,889 $162,889

CDs are the safest investment growing to $162,889 after 10 years. A 100% stock portfolio that yields 8% each year gives you the largest dollar amount after 10 years but the same portfolio with a -8% yield each year gives you the least number of dollars.

Because there there is no "correct" allocation that applies to everyone, you must decide which mix is right for you. Then you can start selecting individual stocks, bonds and cash instruments that meet your needs.

Use the Basic Asset Mix Calculator to compute the value of any mix of stocks, bonds and cash.

The Lost Dollar Test

First, before you invest a dollar in any stock or bond, ask if you can afford to lose that dollar. If you answer no, avoid investing the dollar in stocks or bonds and invest it in certificate of deposits. With CDs your returns are not spectacular but you will not wake up to find that you have lost a chunk of your nest egg. CDs are safe and convenient.

With CDs you can use a laddered approach to spread your money among CDs of varying maturities so can can have ready access to short maturing CDs and higher rates for longer term ones.

If you are willing to put a dollar a risk, you could invest that dollar in stocks or bonds. But understand that you could lose part or all of your investment. That is simply the nature of owning risky investments. If you want to own bonds, be sure to hold them until they matures so you are guaranteed to receive the face value of the bonds when you redeem them. Otherwise, if you sell the bonds before they mature, you could lose money.

If you want to own stocks, buy stocks that pay a dividend, preferable stocks that have long periods of increasing dividends. Dividends are real money in your pocket that you can spend or invest. If you do not need the dividends for income, reinvest them to accumulate additional shares.

If you prefer to own individual stocks, avoid buying stocks that are on the price downside and avoid paying too much for a stocks that have run up in price. For example, as of August 1, 2005 most real estate, energy and many commodity stocks have experienced prolonged upsides and are due for price corrections.

Another play is to buy cyclical technology stocks such as semiconductors stocks when they start a new upside. Of course you must watch these stocks daily to understand their price moves. So if you are not willing to commit that kind of time and effort, do not own them. As of August 1, 2005 most of these stocks have run up in price and are not a good buy.

If you believe in the overall soundness of the United States economy, you could buy shares of the SPDR Trust (SPY), an exchange-traded fund that tracks the S&P 500, the index that includes the 500 largest companies in the United States. Reinvest the dividends if you want to accumulates shares and hold the fund through the ups and downs of the the stock market. Current prices could come down in price but if you buy now and start reinvesting dividends, you will accumulate more shares at lower prices, which would soften the impact of declining prices.

Avoid high-fee managed mutual funds because the annual fees will substantially reduce your total return.


To get started you could put a portion of you money in stocks and or bonds and the remainder into CDs. The percentage mix depends on your individual circumstances for there is no single allocation that is right for all individuals.

If you think stock prices are too high, then wait until they come down. Do not chase stocks just for the sake of owning them. And always apply the lost dollar test before you invest.

If stock and bond investing makes you nervous, then buy a ladder of the highest rate CDs you can find and rest easy.

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