The Danger of Trying to Play "Catch Up" with your Investments

Over the past 15 years I have had countless discussions on risk and investments and have found that the concept of time is misunderstood.

In those discussions about risk, I have had many tell me that they only have a small amount of time before retirement and they need to play “catch up.” So, what is the best way to make up for lost time? You just have to invest aggressively.

You always have the probability (although low) of selecting a high flying investment, making a big fat return, and getting caught back up quickly. Unfortunately, the higher probability is that you take on all of this risk and it ends up in big losses.

Prudent Rule 1 when it comes to investing – Aggressive investments can lose money as fast as they can make money. However, losses from aggressive investments are much tougher to make up. For example, if you lose 50% of your money it will take a 100% gain just to break even.

And history would show that you can easily lose at least 50% in an aggressive investment (see internet and technology stocks 2000 to 2002)

To illustrate this concept of loss versus gain, I went to http://www.morningstar.com/ and took a look at some of the mutual funds that they characterized as aggressive. A good example is a fund that Morningstar classifies as aggressive.

In 1999, this fund returned 291.15%. With that type of return, many investors probably invested in 2000 hoping for the same type of growth. Let’s say that you were behind in obtaining your retirement goals and decided to invest money into this fund right before that big year. You started off with $ 10,000. By the end of 1999, you turned that $ 10,000 into $ 39,115.00.

However as of June 30, 2007, that $ 10,000 would be worth $ 4,828.00.

Now that is an extreme example. However, it does illustrate how dangerous aggressive funds can be and trying to utilize them to get “caught up” for retirement.

Just keep in mind that all investments go through good and bad cycles or time periods. The problem with the aggressive type fund is that the bad cycles have a greater impact on your money than good cycles do on the positive side.