hr: Money

Ok, it’s finally happened. Your dream has come true, and your unheard of rich spinster aunt has just left you with a whole pile of cash. Visions course through your mind of how you’re going to spend it, and then a thought strikes you, maybe you should invest all of it! That’s a great idea, and one that almost every financial advisor will give you.

Photo Credit: richardrichard

But your story is just starting. Suppose you want to invest all of it, why not put the whole thing in bonds that will give you a nice fixed income for life. Sounds like a good idea. Until you factor in some scenarios. Assume that you’re somewhere around 35-40 years old. The central banks, in trying to stimulate the economy have raised the interest rates, and inflation is at an all time high.

All of a sudden, your bonds are screwed. They returns barely keep up with inflation, and the prices skydive. This of course is because of the reverse relationship between interest rates and bonds.

Far better is to think of the long term, and invest the majority of it in stocks systematically. This will build a nice little nest egg for you in the long term, and will mean that you will get returns that are two or three times better that those of stocks. If you’re young, you can easily absorb the risk, and rest happy that you’ve done the really smart thing.