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Risk in the Real World

Goals, Theory

Talk about portfolio growth rates for long enough and people start to glaze over.  Numbers get compartmentalized, and the concept of risk gets hazy.  After all, if you’re a long term investor you can afford to have have a high risk tolerance, right?  Common advice is that if you hold onto your investments long enough, you’re virtually guaranteed a good return.

Like most things in popular finance, I believe that’s a gross over-simplification.  So let’s look at a savings and investing example in real-life terms — saving for a college fund.  Let’s assume that a proud new parent named Sarah wants to put away enough money each year to save $100k in today’s dollars in 20 years (the absolute amount will be much higher than that due to inflation).  How much should she save, and how should she invest the money?