The exhibit below shows the importance of the rate of return on your investments, especially over long time horizons.  The exhibit shows the growth of a $10,000 investment (no additional contributions) at various rates of return over a series of time horizons.

 

For example, note the difference in ending values over a 30 year time horizon between a 5% return and a 15% return.  The 15% return portfolio has an ending value of over $660k, while the 5% portfolio only grows to $43k.  The 15% portfolio has a difference in ending value of over 15 times the 5% portfolio.

 

Initial Investment
10,000
	Time Horizon
Return	5	10	15	20	25	30
3.00%	11,592.74	13,439.16	15,579.67	18,061.11	20,937.78	24,272.62
4.00%	12,166.53	14,802.44	18,009.44	21,911.23	26,658.36	32,433.98
5.00%	12,762.82	16,288.95	20,789.28	26,532.98	33,863.55	43,219.42
6.00%	13,382.26	17,908.48	23,965.58	32,071.35	42,918.71	57,434.91
7.00%	14,025.52	19,671.51	27,590.32	38,696.84	54,274.33	76,122.55
8.00%	14,693.28	21,589.25	31,721.69	46,609.57	68,484.75	100,626.57
9.00%	15,386.24	23,673.64	36,424.82	56,044.11	86,230.81	132,676.78
10.00%	16,105.10	25,937.42	41,772.48	67,275.00	108,347.06	174,494.02
11.00%	16,850.58	28,394.21	47,845.89	80,623.12	135,854.64	228,922.97
12.00%	17,623.42	31,058.48	54,735.66	96,462.93	170,000.64	299,599.22
13.00%	18,424.35	33,945.67	62,542.70	115,230.88	212,305.42	391,158.98
14.00%	19,254.15	37,072.21	71,379.38	137,434.90	264,619.16	509,501.59
15.00%	20,113.57	40,455.58	81,370.62	163,665.37	329,189.53	662,117.72

 

I am not advocating taking outlandish risks with your retirement funds in order to gain outsized returns.  Clearly, you need to be able to sleep at night, or you will be miserable no matter how much money you have. 

 

However, there is a risk that your savings will not grow enough for you to live on in retirement unless you take appropriate risks for your age and time to retirement.  For instance, if you are under 30 and fully invested in a money market fund, then you probably will end up not having enough money when you retire, as your returns will be closer to the 3% end of the exhibit. 

 

Alternatively, if you invest in a mix of asset classes that have tended to produce higher returns over a long period of time, you have a greater chance of living more comfortably in retirement.  It is very important that you diversify your investments so that you don't have "all your eggs in one basket".  If your investments are too concentrated, there is a higher probability that one market event could wipe out a significant portion of your life savings.  Generally, diversification includes owning a mix of stocks, bonds and cash instruments but may also include other asset classes such as commodities and real estate.

 

If you're unsure what type of asset mix is appropriate for your age, one easy answer is to purchase a life cycle or target retirement mutual fund, which are available from almost all major mutual fund companies.  These funds automatically readjust their holdings to account for the time horizon until a specified date in the future, getting more conservative as the date approaches.

 

Good luck and happy investing !