What Do I Do with My Money Now?
Scared by all the financial upheaval? Not to worry. PINK put the questions you want answered to our financial experts – and got some surprising answers.
With all the gyrations in the market, should I get out of stocks entirely until this blows over? Should I at least seriously reallocate my portfolio?
Pam Krueger, co-anchor of PBS's MoneyTrack and author of The MoneyTrack Method: A Step-by-Step Guide to Investing Like the Pros: Now is not the time to sell or even reallocate your investment funds, especially if fear is the motivating factor. The stock market might not be at rock bottom, but we certainly aren't at the top.
The entire stock market is taking a hard beating because of the crisis in the financial sector, which accounts for about one-third of all stock market activity. That said, there are many profitable companies out there, and their share prices have fallen not because they are losing money, but because of collective fear. Experts know this and often pick up shares of companies at bargain-basement prices because of the fear. Instead of reallocating, I recommend taking this time to reassess your portfolio.
Contact the institutions that house your investment accounts – your bank, broker or your own employer – to get a complete breakdown of what companies and industries you own. Better yet, just log onto your accounts and review what's on your statements.
Once you've gathered all the information, here's some really good questions to ask of your portfolio:
- Are your investments distributed across a wide variety of industries and sectors? Do you hold mutual funds that own stocks in pharmaceutical, energy, consumer goods, entertainment companies, etc.?
- Do you own a good mix of large, medium and some smaller companies across all your accounts?
- What about foreign stocks? Most big mutual funds have invested in companies that earn profits from businesses all over the world, including Europe and Asia. As the saying goes, diversification wins all battles when it comes to investing. Especially now more than ever!
Once you gain a very clear picture of what you already own, you will either be satisfied to know that you are broadly diversified or you will realize that you are too heavily concentrated in one area. For example, perhaps you are too heavily weighted in technology and need to balance your investment mix with some old-fashioned blue-chip companies. Even then, I don't recommend selling out and dumping big positions right now. Simply make a mental note to yourself to check back once you see some life restored to those damaged areas. This market might take a year or two to rebound, but consider a rational approach to reallocating. Just don't do it out of fear.
Stephanie Giroux, chief investment strategist, TD Ameritrade:
History has proven that cashing out of the market in times of crisis is usually the absolute wrong thing to do. In fact, these types of crises often prove to be buying opportunities for long-term investors. This is why TD Ameritrade advises clients to use discipline rather than emotion in making investment decisions. It is prudent, however, to take a fresh look at your portfolio to determine if it is aligned with your long-term financial goals and your risk tolerance. Most importantly, look to see if you have adequate asset class diversification.
Galia Gichon, founder of financial advisory company Down to Earth Finance: If you do not need your money for at least seven years, stay in the stock market. If this is your timeframe, this is not the time to ignore your IRA; if anything, your investments need more attention than ever. If you don't keep investing, your retirement portfolio could run out of money since your portfolio won't be able to keep up with inflation (study by T. Rowe Price). Make sure you are diversified in large cap, small cap, international and bond mutual funds.
Consuelo Mack, anchor and managing editor of PBS's Consuelo Mack Wealth Track: Do not get out of stocks entirely. Individuals are notoriously bad at market timing, and you would miss the recovery when it happens. Stick to your long-term investment plan. Be broadly diversified among stocks, bonds, cash and some commodities like gold. Reallocate as you would normally. Warren Buffett is starting to buy stocks selectively. He is a pretty good model to follow!
With some big banks in jeopardy, are my liquid accounts safe? That cash is my rainy day fund, and I may need it!
Pam Krueger: Your concern is valid. This is why the government has stepped up to ensure that money market accounts will remain completely liquid to you. If you have concerns about your brokerage firm, I recommend you transfer those funds to a bank that offers FDIC insurance up to $250,000.
Stephanie Giroux: Investors should remember that FDIC insurance covers $250,000 in cash held within a bank account. If you have more than $250,000 in cash, you should consider holding it in multiple banks in increments up to the $250,000 limit. And always try to have at least six months' worth of living expenses in a cash-type account on hand.
Galia Gichon: You can check to see if your bank account is FDIC insured at this new site: http://www.myfdicinsurance.gov/.
If I have extra money to invest, should I put it in stocks now or hold it in cash and wait?
Pam Krueger: If you have a very clear picture of what is in your stock portfolio currently and want to own more of a particular company, industry or even the entire market (index fund), then now is a darn good time to invest that extra money.
Based on my favorite principle of dollar cost averaging, I would cycle in your extra money in small increments over time. Say, for instance, if you have $10,000, divide that over the next 12 months. Set your account on autopilot by directing it to automatically transfer that $833 from your bank account to your investment account each month for the next 12 months.
Stephanie Giroux: What you should do now depends very much on your individual financial circumstances, how much time you have until you need the invested money and what your overall risk tolerance is with regard to withstanding short-term volatility. Assuming you have the recommended six months' living expenses in cash, anything over that should be invested in the financial markets (equity or fixed income, preferably) consistent with your long-term return objectives.
While we cannot say for certain how long it will take the equity markets to come back, the long-term trend is most definitely up, and past times of crisis have typically resulted in significant stock market gains approximately 12 to18 months after the market bottoms. With that in mind, we would suggest you use any excess cash to add needed diversification to your portfolio. Try to view the current market turmoil as an opportunity to buy into and build your long-term investment portfolio.
Galia Gichon: This really depends on your timeframe. If you want to have access to this money in less than 5 to 7 years (for a down payment or college tuition), then you should keep it in just a money market. You can find ones that yield a higher interest rate than your local bank (and are FDIC-insured) at ingdirect.com and emigrantdirect.com.
Consuelo Mack: That depends on your comfort level and time horizon. If you might need the money in the next two years, keep it in cash. If it is a long-term investment, put a little bit at a time to work in areas you are not yet invested in, or are underinvested. This is a good time to diversify because most investment sectors are down on the year.
I'm worried about my retirement portfolio, which is way down in value all of a sudden. What should I do?
Pam Krueger: It's not just your retirement portfolio; the entire stock market has taken a beating thanks to the banking and financial crisis. Worry is a natural, emotional response to things we feel are out of our control.
Consider this: If you are in your 20s, 30s or 40s, this is probably the first time you've ever seen the market go down. Rest assured, the stock market is still the best vehicle to grow your money the most over time. Yes, even more than real estate. Historically your investment in the stock market has grown, on average, about 8 percent a year, so there is no question that the stock market works. But there's a catch. The market only works over very long timeframes. If you are in your 40s, you still have another 20-plus years to let the market work its magic.
If you are in your 60s and 70s, you should have already shifted the bulk of your stock funds into safer, less volatile bonds or bond funds. If you missed that boat and are still heavily concentrated in stocks, just sit tight. Give the stock market the time it needs to bounce back, and at that point start transitioning into a more stable, conservative income-oriented mix of investments vs. stocks, which are primarily bought for more aggressive growth.
Stephanie Giroux: This depends on how much time you have until you plan to retire. If you have a relatively short period to recoup recent market losses, you may need to consider increasing your contributions or delaying the planned date of retirement. For those of you with a longer time horizon, stay the course and keep contributing so that when the equity markets do rebound, your portfolio will benefit.
Galia Gichon: It is hard to open your recent retirement statement and not feel anxiety. One thing you can do is perform a quick checkup on the mutual funds within your retirement plan. In this market, most mutual funds are going down, but there are some that perform better than the market. You can evaluate if your mutual funds are outperforming the S&P 500 Index or another comparative index by checking the mutual fund's snapshot on Morningstar.com.
Consuelo Mack: How close are you to retirement? How well diversified are you? This is a down year for most investors. If you can ride it through, stick with your investment plan. You won't know the bottom until you are well beyond it and will have missed the recovery.
Warren Buffett bought $5 billion of Goldman Sachs stock. Should I be looking at certain financial stocks as bargain buys too, or is that sector way too risky?
Pam Krueger: Way too risky. The entire financial sector is simply too volatile right now. Not even Warren Buffett knows for sure how good his Goldman investment is going to turn out. That said, if you have a small amount of "funny money" (aka money you don't mind gambling away), then it would be an ideal time to shop for bargains. My advice is to stay away from bank stocks that are already identified as having major problems, such as Wachovia.
I'd go looking for bargains in totally different industries because those stocks have been beaten down with the rest of the market, but not because they aren't making money.
Stephanie Giroux: The financial sector has seen a significant loss of value and may be starting to look more attractive based purely on valuation measures. But given the fundamental changes that are taking place in our financial system, we believe you need to tread carefully when making broad-based purchases of these stocks. TD Ameritrade does not recommend individual stocks.
Galia Gichon: Most financial stocks are a large- or mid-cap blend. If this fits into your long-term portfolio's asset allocation – meaning you are underweighted in large- or mid-cap blend – then you can buy some. Be sure to keep any stock or mutual fund purchases to less than 10 percent of your portfolio so you remain diversified. A safer bet would be to buy a financial services mutual fund that is no-load and has a low expense ratio. Then you are keeping your fees low but paying for professional money management.
Consuelo Mack: Financials are undergoing a huge shakeout. Buffett got a terrific deal and has dealt with Goldman for years. At this point it is buyer beware in financials. I would avoid the sector unless you are willing to take the risk and lose the money. The upside could be great, but so could the downside.
History has proven that cashing out of the market in times of crisis is usually the absolute wrong thing to do. In fact, these types of crises often prove to be buying opportunities for long-term investors.
Stephanie Giroux, chief investment strategist, TD Ameritrade
