Q&A: All investments involve risk

Dear Liz: I want to protect principal in my modest retirement savings account for future needs. I’ve been in cash and money market funds, but if the recent surge in inflation continues, purchasing power could decrease 25% or more over the next five years. Certificates of deposit and Treasury Inflation-Protected Securities (TIPS) tie money up for long periods and emergency use would result in significant loss. I’ve examined diversifying into real estate, commodities, foreign currencies, gold, but they all go up and down. Can principal be protected from loss and inflation?

Answer: No.

Investments that protect your principal typically have returns that trail inflation. Even though your principal is protected from one kind of loss, you’re all but guaranteed the loss of buying power over time. For inflation-beating returns, you need to take some risk.

Young people with decades until retirement should keep most of their retirement savings in stocks, but even those in retirement typically need to have some exposure to the stock market to preserve growth and buying power. A fee-only, fiduciary financial planner could give you individualized advice about how much risk is appropriate for you to take.

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