Inflation is that nasty little thing that eats away at your hard earned savings. For something that is essentially intangible it can do more damage than you realize. Granted the post recession effect on inflation has left it somewhat flat, but that isn’t going to last forever. In fact, right now we have some of the lowest interest rates we have seen in our lifetimes, and yet the stock market is hitting all time highs. To me this begs the question, “why are you so heavily invested in CD’s, money markets, and treasury bills”?
The recession has left many with a sour taste for investing, they are scared by the media, and they still have the dent in their 401K’s to remind them first hand of the dangers in investing. But that doesn’t mean to you should step aside and throw all of your cash into a low interest earning savings account, or lock up all of your funds in a CD that will only cause you to lose money to inflation over the long run. There are many relatively safe investments that will help you diversify and outpace inflation at the same time.
I am a fan of mutual funds, and more importantly mutual funds that pay dividends! This is really the best of both worlds. Dividends build in returns on your investment regardless of the share price fluctuations, and they also serve to diversify your investment base. On a slightly riskier level, you also have specific stocks that payout dividends. I personally investment money each month in ADP and Johnson and Johnson. Both companies have decades of proven returns via share price and dividends. Let me also note that I automatically re-invest all of my dividends back into the stock itself.
I’m not saying to avoid savings and money market accounts altogether. They are an important part of diversifying your asset allocation. All I am saying is that you shouldn’t allow fear to overcome your better judgement. If you are willing to invest your 401K and other retirement funds into the market, you should also be prepare to invest post-tax funds into the market as well.