(b)Mused: Risk Aversion

September 13, 2011 (PLANSPONSOR (b)lines) - While helping out my very ill father recently, I’ve had a glance at his personal finances. Sitting with him to pay some bills (which he is diligent about paying on time), I was proud of how well he’s managed his finances and of the amount of discretionary money he’s been able to maintain in his retirement years. I wish I was more like him.

But, I think back to when he first retired and decided to roll his 401(k) assets to another provider. He handed me a folder full of prospectuses and told me to “pick something that won’t lose money.” I told him the only choice was the prime money market fund and that he shouldn’t ever lose his principal, but he probably wouldn’t make much either.  That was fine with him.  

In the years since, the provider has tried to encourage him to diversify and I’ve explained that doing so could help him build up more savings, but he has held fast to his conservative stance.  

Now, with the market activity of the past three years and his mounting medical bills, although he has not received a dividend payment from the fund in quite some time, it looks like staying put was a smart move. However, I can’t help but wonder how much more he could have if he had been less risk averse in the beginning. My Dad’s been retired for 12 years. Would he have lost all gains in the past three years or would he be still ahead of his original principal balance?    

My Dad’s situation shows that while risk aversion is good in some areas of personal finance (i.e. staying out of debt, paying bills on time, controlling spending), it may be better for long-term savings to take some chances. It also shows that there may still be time after retirement to build up savings.