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Ask the expert: Can I be too conservative with my money?

May 13, 2011

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: A financial planner recently told me I was being "too conservative" because I rarely venture into stocks or mutual funds. This sounds like a sales pitch to me - is there really such a thing as being too conservative with money?

A: If you think it sounds like a sales pitch when a financial planner says you are being too conservative, your instinct is probably right. And yet, though it might be a sales pitch, it might also be accurate. It is possible to be too conservative as an investor, especially when pursuing long-term goals such as saving for retirement.

In an investment context, the term "conservative" is generally used to mean avoiding risk, but the tricky thing about investment risk is that it comes in different forms. The risk of losing money because an investment goes down is obvious, but what about the risk that you might not earn enough to afford retirement, or that you might lose ground to inflation? These are also significant risks in retirement planning.

Naturally, stocks expose you to more risk of loss than most bonds and than properly-insured deposit accounts. However, conservative deposit accounts offer much lower returns, and in today's environment won't even keep pace with inflation. According to the FDIC, average rates on savings accounts today are at 0.15 percent, and money market rates average 0.21 percent. CD rates range between 0.13 percent and 1.64 percent, depending on the length of the CD. Meanwhile, year-over-year inflation is at 2.7 percent.

So yes, there are risks to being too conservative with your money. Just don't let anyone talk you into going too far in the opposite direction. The risks of being too conservative can hurt you gradually, over time. The risks of being too aggressive can be sudden and violent.

Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to the "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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