While money market investments or cash can be an important part of a diversified portfolio, leaving a large portion of your portfolio parked is like putting the brakes on growth.

Many investors who make last-minute RSP contributions choose to �park� their money in lower-return investments, such as money market funds. Other investors, concerned with recent volatile markets, or not aware that stocks rebounded, may prefer to leave their money in cash.

While money market investments or cash can be an important part of a diversified portfolio, leaving a large portion of your portfolio parked is like putting the brakes on growth.

When planning your investments, you need to consider the effect that different rates of return will have over time. Growth asset classes, such as equities, although more risky, offer better potential for increasing your wealth.

Inflation Takes Its Toll

You should also consider the effect that inflation can have on returns over time. The following chart illustrates the power of compounding and shows how important the return differences are between asset classes. Here is the dollar amount of growth from a $10,000 investment, after deducting 2% annual inflation from the nominal (or gross) assumed return, before taxes:

Small differences in annual returns can make big differences in real wealth. People saving for retirement, or even older people � with today�s longer life expectancies � can rarely afford to park most of their money indefinitely.

Reduce the Risk of Growth Investments

It�s true that growth investments, such as equity mutual funds, carry more risk than money market funds. The key to reducing risk is diversification. Having a balanced portfolio by allocating your investments across assets (money market, fixed income and equity) can help maximize potential gains while minimizing risk.