Caught Between Scylla and Charybdis
Remember the story of Odysseus the Cunning? A clever strategist and inventor of the Trojan Horse, he left the Trojan War as a hero. According to Homer's "Odyssey," Odysseus expected a quick and easy sail back to Ithaca. Alas, Poseidon, God of the Sea, favored the Trojans, and placed many obstacles between Odysseus and home.
Two of those challenges were Scylla and Charybdis, sea hazards lying close together, blocking the fastest way for Odysseus to return home. Homer described Scylla as a six-headed monster with razor-sharp teeth, lying in wait to leap out of the water and snatch sailors from their ships. Charybdis was a monster with a massive mouth, big enough to suck in all surrounding water to make strong whirlpools. (There's a great illustration here http://en.wikipedia.org/wiki/File:Caught_between_a_rock_and_a_hard_place.jpg ).
Odysseus, his crew, and his ship were caught between Scylla and Charybdis. Should he sail closer to the monster who would eat his crew, or the monster who would sink his ship?
Odysseus was forced to make a tough choice. He rationalized that it was better to lose six of his crew (one for each of Scylla's heads) than lose his entire ship in the whirlpool. He steered towards Scylla, lost shipmates, but made it past the monsters.
What's the connection between Greek mythology and financial planning? Sometimes investors have to choose between the lesser of two evils, just as Odysseus did.
We've all seen that because interest rates are so low, many investments that guarantee principal pay very little in interest. Savings accounts, checking accounts, money market funds, and certificates of deposit provide a negligible return.
On the other hand, riskier investments that historically provide growth have all suffered beatings over the last decade. Real estate, commodities, and stocks have all taken hits as the economic waters ebbed and flowed around them. What's an investor to do?
The answer is to make the same choice as Odysseus: if you're stuck between the devil and the deep blue sea, keep a calm head, weigh your options, and make the least bad choice.
If you need money over the next few years, lower-risk investments are your least bad choice, even with a low yield. The danger of losing your principal outweighs the danger of low earnings.
If you don't need money for many years, higher-risk investments (real estate, commodities, stocks) are your least bad choice, even with their added risk. The danger of inflation (as prices of goods and services rise over time) outweighs the danger of losing money in a bad year.
As a general rule, the longer until you'll need money, the more risk you can take with it. While no one wants to take on unneeded risk, you can exercise some degree of control, and choose which type of risk to assume. Be as clever as Odysseus, and choose risk's least bad form.