When you work on your retirement investment strategy, one of the key issues is the rate of return you expect to earn on your money. Historically, different investments or asset classes have achieved different rates of return over different time periods. When you compare the returns on common stocks, bonds and cash, common stocks have had the highest rate of return over a long period of time. Cash and cash alternatives, which provide safety of principal and pay interest, have provided the lowest long-term rates of return. If your risk tolerance is low, you'll need to assume a relatively low rate of return on your investment when you do your planning. Likewise, if your risk tolerance is higher and you have a long-term time horizon, investing in common stocks or stock mutual funds will allow you to assume a higher rate of return for planning purposes. But remember, a higher rate of return does not come without some risk.
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