David Levine goes against conventional wisdom and presents a new strategy for long term saving that he calls the “Goldilocks” strategy: not too long and not too short. He explains,
Instead, to minimize the real risks we all face in meeting our unknown, long-term financial obligations, you need a different strategy, one that produces reliable, spendable cash flow and superior returns, minimizing the likelihood that the inflation-adjusted value of your portfolio will decline over time.
The best way to achieve those goals is to avoid “perfectly safe” cashlike assets, relying on your savings account or money market funds only for a 30- to 60-day cushion to cover your day-to-day obligations, plus enough extra at times to satisfy those occasional outsize expenses like a child’s college tuition bill that is due in the next few months.
After that, your primary goal is to build wealth. Not surprisingly, equities do best. That’s why most of your money for your retirement should be invested in stocks.
But you may not have realized that intermediate-term bonds, over the long run, are superior not just to cash but to long-term bonds as well. So when thinking about where to invest your fixed-income assets, remember Goldilocks: The best place to be is not too long and not too short.
The return you expect to earn and the risk associated with bonds rise as maturity lengthens. But the rates at which they rise are neither uniform nor equal. At first, as you move out of cash into short-term bonds your expected return rises rapidly, but risk — if we define it as the chance that you will lose to inflation — actually diminishes.
Continue reading the full story here: The Goldilocks Strategy for Prudent Investors
Posted by Allison Trupp, Associate Editor, Wealth Strategies Journal