Don't let a fear of stocks cost you in retirement

I don't trust the stock market, so I have all my savings in money-market accounts. I plan to work another 10 years before I retire, however, so where can I invest to earn a higher return without too much risk? -- David H., Winona, Minn.

You're not alone in your wariness about stocks. Even as most investors cheered when the Dow Jones Industrial Average climbed into record territory this week, some reacted with trepidation.

Where the optimists saw the Dow's ascendance to new highs as affirmation of an improving economy that would propel stock prices even higher, skeptics feared that, among other things, the effects of sequester budget cuts might knock stocks from their new perch.

The truth, of course, is that neither I nor anyone else knows whether stock prices have a lot farther to run or will take a dive. But I do know this: If you are investing for the long-term -- and you are since you have 10 more years of work ahead of you, plus maybe another 30 or so in retirement -- avoiding stocks completely can be a costly move.

If you had invested $10,000 in money-market funds 20 years ago, for example, you would have just under $19,000 today. Had you put the same $10,000 in bonds, you'd have almost $31,700. And what if you'd invested that ten grand in stocks? You'd be sitting on a bit more than $51,000.

Such superior performance isn't guaranteed. And even when stocks deliver outsize long-term gains, those returns come with a white-knuckle ride. But the very fact that investors know stocks are more prone to gut-wrenching setbacks -- such as the 50%-or-so declines that began in 2000 and 2007 -- is exactly why they're able to generate higher long-term returns than less volatile investments.

So instead of engaging in an ultimately futile (and possibly dangerous) search for investments that purport to offer high gains with low risk, I suggest you try to ameliorate your feelings of distrust with an attitude that respects the risks in stocks but recognizes that it's also possible to reap some of their lucrative returns while holding those risks to a tolerable level.

The simplest and most effective way to do that is to invest a portion of your savings in stocks, but offset their inherent volatility by devoting the rest to bonds and cash.

To arrive at the right mix, you first must have an accurate sense of your risk tolerance, or how much you can watch the value of your savings drop before you start selling investments in a panic. At the same time, though, you don't want to take too cautious a stance, as the returns you earn may not be large enough to create a nest egg that will sustain you throughout retirement.

To see how different blends of stocks, bonds and cash might perform over the long haul -- and what sort of setbacks each mix might encounter in the short-term -- you can check out Morningstar's Asset Allocator tool.

Once you've settled on a blend that seems right for you, you can then plug that mix, along with such information as the amount you have saved and how much you're putting away on a regular basis, into a retirement calculator. That will show the probability that your saving and investing will allow you to achieve an acceptable standard of living in retirement.

If the chances are uncomfortably low, you can see how making various adjustments -- saving more, investing differently, postponing retirement -- might improve them.

Or you can continue to skip stocks altogether. In that case, though, don't be surprised if you have to ratchet up your savings to a prodigious rate to have any hope of maintaining a decent standard of living after you retire.