This One Mistake Could Be What's Standing in the Way of a Comfortable Retirement

I was talking to a friend of mine the other day who's in her early 40s. She earns a good salary and is able to save nicely for retirement. But when she told me that the bulk of her retirement savings were in cash, I almost wanted to jump through the phone and shake her silly.

When I asked why she was sticking to cash at an age when retirement is a good 25 years away, her answer boiled down to being scared of the stock market. And she's not alone. A recent survey by Empower found that 28% of Americans say they feel safer when they keep their money in cash, as opposed to investments.

Investing in the stock market indeed carries some risk. But not investing in the stock market might carry an even greater risk.

You don't want to end up short on retirement funds

Many people shy away from stocks because they're worried about the possibility of losing money. And it's true that if you build a stock portfolio, its value might swing wildly from one week or month to the next. But one thing you should know is that the stock market has a strong history of rewarding long-term investors over time.

Over the past 50 years, the stock market's average annual return has been 10%. But there were plenty of years during that stretch when the market performed poorly. That 10% return accounts for both periods of a down market and a strong one. And if you're investing over a lengthy period, such as my friend is for retirement, then it's important to recognize that you're likely to make money from stocks overall.

What's more, not investing in stocks means running the risk of not having enough money to pay your retirement expenses. Let's say you save $300 a month for retirement over a 40-year period, only you stick to cash and get an average annual 3% return on your money. All told, you'll have about $271,000.

Meanwhile, let's say you mostly invest in stocks, only your portfolio doesn't do as well as 10% a year on average. Rather, let's be more conservative and assume an 8% average yearly return. Still, with that same $300 monthly contribution and 40-year window, you're looking at retiring with over $932,000 instead of $271,000. That's a huge difference.

A good approach to stock market investing

If you're worried about losing money in the stock market, which is understandable, one thing you can do to mitigate that risk is to build a diversified portfolio. You can do so by investing in stocks across a wide range of industries. Or, you can load up on broad market ETFs, or exchange-traded funds.

Another thing you should do if you're fearful of stock market losses? Don't check your portfolio every day, week, or even month. Seeing losses on the screen might cause you to react and sell assets when they're down, thereby locking in losses. Instead, check your retirement plan or brokerage account every quarter.

And if you're checking at that cadence and you see a loss, pledge to not make any moves until the following quarter unless there's a specific reason to be worried about a specific investment you hold. One incident of missed earnings, for example, doesn't mean you should dump a stock. A series of missed earnings is a different story. (You can find out whether a company you're invested in has missed earnings or not by listening in to its quarterly earnings calls, reading transcripts of those calls, or reading press releases that usually follow or come out in conjunction with those calls.)

Not investing in stocks carries more risk than you might realize. On my end, I'm trying to convince my friend to allocate some of her assets to stocks. Showing her numbers like the ones above is helping her see the light. But if you've been staying away from stocks, recognize that refusing to invest in them might be the one thing that stands in the way of the comfortable retirement you deserve to enjoy.