|
What to
do?
The stock
market has proven again that it's capable of making
vicious attacks on your money. But just when you think
all is lost, the market also can transform into its
gentler self.
The past
few weeks have been enough to make you crazy, especially
if you are among the great majority of people who don't
follow the stock market day in and day out and imagine,
incorrectly, that someone actually knows what's going to
happen.
Let's
start there. If you have been following the news, you
know that there is talk again of a possible recession,
and there are worries that debt problems in Europe could
cause problems in banks. Theories about the outcomes are
diverse. But I can assure you that no one knows how this
will end.
Notable
economist Martin Feldstein said there is a 2-1 chance of
a recession within the next 12 months. Goldman Sachs
says there's only a 1-in-3 chance. So don't trust anyone
who claims they know. Crystal balls are foggy. But
here's what you can do to insulate yourself from trouble
and still build the future you want.
PROTECT
THE MONEY YOU WILL NEED SOON: Will your child be going
to college in a year or two? Are you saving for a down
payment on a house or do you plan to fix up the house
soon? Are you planning a dream vacation in a couple of
years? Do you have an emergency fund?
None of
this money should be in the stock market. Consider this
rule of thumb: Put no money in the stock market that you
will need to use within five years. You may even give
that five-year rule a boost. Harris Private Bank chief
investment strategist Jack Ablin notes that until going
through the horrible destructive 2000s, investment
advisers thought that if you kept money in stocks for
six years, you could count on a return about as good as
cash. Now, he said, the common thinking extends that to
11 years.
WHAT'S
SAFE? Cash is safe, but it doesn't grow, so over many
years cash alone won't allow you to keep up with
inflation. Still, for that short-term spending, money
safety is key. Cash can be CDs, a savings account, U.S.
Treasury bonds or a money market fund that invests only
in U.S. Treasury bonds. Be aware, some money market
funds invest more broadly and are exposed to vulnerable
European bank securities. As a result, financial
planners are steering clients away from such funds and
only into U.S. Treasury money market funds.
Also, for
safety, choose a bank that is FDIC-insured or a credit
union carrying National Credit Union Administration
protection. Up to $250,000 is protected, and for
multiple accounts — maybe savings and an IRA — each
may have protection.
YOUR
401(K): Watching 401(k) money vanish between 2007 and
2009 has left people gun-shy about their investments.
Some have sworn off stocks forever; others have promised
themselves that they will run away at the first inkling
of danger. Neither is smart.
The stock
market can plunge or soar without a moment's notice,
leaving no time to bolt. Likewise, the healing power of
the market often arrives when you least expect it. In
early 2009, after stocks had fallen more than 50
percent, many economists and fund managers were
terrified, but stocks surprised people, soaring 100
percent in just a few months and healing a lot of the
damage in 401(k) plans.
A person
who had about $10,000 in the stock market before the
crash would have had less than $5,000 at the worst point
in April 2009, but if they left it alone they would have
had about $9,000 now. Yet if they had yanked it at
$5,000 and put it in a savings account, they would be
lucky to have about $5,100 now.
Rather
than go through that again, use the last downturn to do
a gut check. Mixtures of stocks and bonds provide a hint
about how bad losses can become with certain ratios but
also show how soaring stocks can grow money with time.
So look at the losses in the accompanying portfolios
tracked by Ibbotson Associates, of Morningstar, and ask
yourself if, in the midst of a horrible stock market
again, you would feel compelled to bolt or last it out.
The
standard practice in saving for retirement is to have
some stocks so your money grows over many years and some
bonds to cushion the bad periods in the market.
GROW YOUR
MONEY IN RETIREMENT: What if you are retiring in a year?
You might think you need every penny of savings in cash
because you will start spending some of your savings.
This is
not the case. You need to keep growing your money so you
don't run out. All cash and bonds often won't do the
trick. Financial planners like to see retirees hold
about five years of spending money in cash to carry them
through any bad market conditions without having to sell
a stock or shares of a mutual fund.
The rules
applied to retirement savings are evolving now that
financial planners have seen the destruction of late
2007 to early 2009. In the past, they told new retirees
to keep about 60 percent in stocks and 40 percent in
bonds and cash. Now many planners have reversed that to
40 percent in stocks. A conservative financial planner,
William Bengen, worries about current risks and suggests
just 15 percent in stocks for retirees now. But most
planners suggest holding some stocks in retirement
because over time they grow money more than bonds.
Remember, you need to make your money last for 20 or 30
years in retirement.
———
10-GRAND
SCENARIOS:
Here's
what happened to $10,000 from late 2007 to the end of
July 2011 for somebody who had invested ...
—80
percent in stocks and 20 percent in bonds (a typical mix
suggested for people in their 20s or 30s): At the worst
point in the downturn in early 2009, it became only
about $5,900, but by the end of July 2011, it grew to
about $17,000.
—60
percent in stocks and 40 percent in bonds (a mixture
often suggested for people in their 40s and 50s): At the
worst point, it became about $7,100, but by the end of
July 2011, it grew to about $15,700.
—50
percent in stocks and 50 percent in bonds (a mixture
often suggested for people close to or beginning
retirement): At the worst point, it became about $7,800,
but by the end of July 2011, it grew to about $15,000.
Note:
Stocks are the Standard & Poor's 500 index, and
bonds are long-term U.S. Treasury bonds.
SOURCE:
Ibbotson Associates
|
