Due to a job relocation, for the past 18 months I have
had funds from the sale of my old house and my old
401(k) sitting in a savings account. I did some research
and saw the potential for a stock market downturn and a
bond downturn happening together. I am risk-averse and
would rather avoid risk and give up some yield. Iím
close to retirement. But itís probably not wise to
keep this huge sum of money in a savings account. What
should a cash-rich person do?
E. B., Chicago
Your concerns about a downturn in the stock and bond
markets have been widespread for months. But if the
markets have taught people anything recently, itís
that popular expectations can fail to materialize ĖĖ
sometimes for months, sometimes for years.
it can be painful. Simply parking money in a savings
account for years carries risks that people sometimes
fail to appreciate. That money doesnít disappear, but
it doesnít grow. And given the fact that people at age
65 can expect to live until their late 80s or even 90s,
letting all your money stagnate in a savings account
carries the risk that you will run out of money too
early in retirement.
does not mean that concerns about stocks and bonds have
been invalid. Stocks have become pricey and may have a
way to fall if a weak global economy hurts corporate
profits. The stock market has declined about 8 percent
since the beginning of the year and some analysts think
it could be on its way to more than a 20 percent
decline. U.S. Treasury bonds and bond funds have been
OK, but they will become losers when the Federal Reserve
starts raising interest rates.
when will that happen? People have been afraid for years
that the Federal Reserve would raise interest rates and
bonds would become losers. And it hasnít happened.
Predicting interest rates is complicated and the
smartest brains on Wall Street get it wrong. Consider
that half of economists were sure last week that the Fed
would raise interest rates, and then the Fed didnít do
analysts wonder if rates will finally go up in December
and cause bond funds to become losers. Or will it be in
2016 or 2017, as some economists think will happen?
Retirees who have been risk-averse and tried to protect
their money in savings accounts are growing desperate
than taking the risk of earning nothing while you wait
for the Fed to finally make its move, you could consider
a moderate-risk approach that would hedge your bets
could put half, or maybe 40 percent if nervous, in a
Standard & Poorís 500-stock index fund and the
rest in FDIC-insured bank CDs, with maybe half of the
CDs maturing in five years and the others in 10 years.
If you search sites such as Fidelity, Schwab or
Bankrate.com you will probably find CDs that pay between
2.25 and 3 percent interest.
suggesting CDs rather than bond funds because you wonít
lose any money in the CDs if you keep them until they
mature. This is not the case with bond funds, which do
lose money when interest rates climb. And because you
will have some CDs maturing in five years and others
maturing longer than that, you hedge your bets. If
interest rates start climbing, in five years you will
have cash from some of your CDs available and then you
can buy more CDs. In a rising interest rate period, the
new CDs you buy will pay you more interest than current
CDs are paying. Of course, if interest rates donít
rise, you will have the security of a safe investment
that will pay a dependable 2.25 to 3 percent interest.
with that security, you can put some money into the
stock market through an S&P index fund. If the stock
market falls, you will lose money in that fund during
the decline in the market. But the loss might not be as
severe as your nightmares suggest.
example, letís say that during the next year the stock
market goes into a tough bear market, with a downturn of
30 percent. You might be afraid to trust money in the
stock market if you assume you are losing 30 percent.
But you wonít be losing 30 percent of all your money.
Remember, you divided your money, half in stocks and
half in CDs.
only half of your money is losing. Overall, your loss in
the combination of stocks and CDs is about 15 percent.
Actually, it will be less than 15 percent. Remember, you
are earning interest on your CDs and about a 1.1 percent
dividend yield from the stock market index. So when you
blend the losses and gains together, your loss for the
year will be only about 12.5 percent.
a loss is no fun. But itís not nearly as severe as the
30 percent that might be paralyzing you.