Personal Finance Questions and Answers for Young Professionals

I saw this article in USAToday and thought people may enoy it. I would be the “Don’t Cry; Buy” person here. Anyone has an opinion?

 http://www.usatoday.com/money/perfi/basics/2008-01-23-investors-advice_N.htm?csp=34 

The stock market has shed $2.2 trillion in value this year, and the odds are good that part of that $2.2 trillion was yours. The big question now is:

What should I do? Buy? Sell? Panic?

Panic is probably not the right answer. “I spent all day Tuesday telling clients the world didn’t end,” says Harold Evensky, a financial planner in Coral Gables, Fla.

What about buying or selling? Unfortunately, in this year’s stomach-churning market slide, there’s no one nugget of advice that will work for all. If you’re an aggressive investor, you might feel comfortable picking up some bargains in this market rout, which has clawed the Standard & Poor’s 500-stock index for a 14.5% loss since its Oct. 9 peak.

If, on the other hand, you’re a fairly conservative investor, you might want to pare your stock holdings to a level that keeps you from hiding under your bed at night.

Whatever your tolerance for risk, if you have a long-term investment strategy with a mix of stocks, bonds and money market securities, your best move is almost surely this: Hang in there.

“My heart tells me I should get out of equities, but my brain says not to do it,” says Al Viviano, 65, of Louisville. Viviano, with about 45% of his portfolio in stocks, says he’s resisted the temptation to shift to a more conservative mix. “We’ve been through this before,” says Viviano, who was the subject of a USA TODAY Your Portfolio feature in April 2007. “You can’t make money in the market unless you lose money, too.”

Financial advisers say you should keep part of your portfolio in stocks and stock mutual funds, because over the long term — 15 years or more — stocks will generally reward you with higher returns. Even if you’re 60, Evensky says, part of your portfolio should be in stocks. “You’ll still have to make your money last 30 years,” he says.

Furthermore, trying to time the market’s highs and lows is usually a loser’s game. Few of us are nimble enough to catch key turning points. And once you’re out, you have to get back in at the right time. That, too, can cost you.

On Wednesday, for example, the Dow Jones industrial average plunged nearly 330 points, only to reverse course and rally 625 points, to close up 298.98 points. “Many of the best trading days followed closely on the heels of large stock market sell-offs,” Stuart Freeman, chief equity strategist at A.G. Edwards, noted in a report to clients. “The lesson here is that timing can be difficult, and it pays over time to stay invested in stocks despite your upset stomach.”

Still, the stock market’s recent gyrations would give nearly anyone pause. Highflying Google, for example, has plunged 26% from a high of $741.79 in November. Even if you’re invested in a broad-based index fund that tracks the S&P 500, you’re down 11.5% this month.

“Let’s just say I am concerned,” says Margaret Chipman, of Tempe, Ariz. She owns a healthy retirement portfolio and spends freely. But the market’s turmoil, she concedes, could dampen her spending.

Because no one approach will fit everyone, we asked top financial pros how to handle the market’s gyrations. Some, such as FPA Capital’s Robert Rodriguez, are conservative. Others, such as Tom Marsico, founder of the Marsico funds, are more aggressive. All offer sound advice — provided you share their investment approach.

CASH IS KING

If you’re a conservative mutual fund investor, take a page from the playbook of Rodriguez, who also runs FPA New Income, a bond fund: Invest in cash.

USA TODAY
Rodriguez

Rodriguez is letting money pile up in ultra-safe money market securities until he feels comfortable wading back into the market. “We have a buying halt on,” Rodriguez says of his stock fund.

You can increase your own cash holdings by directing future 401(k) contributions into a money market fund.

You won’t earn much: The average money market fund yields about 4%, and that will drop to about 3.25% as the Federal Reserve’s rate cuts take effect. But you’ll have money to invest once the market starts to rally again.

If your 401(k) offers a guaranteed investment contract, or GIC, you might consider that instead. GICs are somewhat like bank CDs; they generally offer higher yields than money market funds, but the yield is fixed for a period of time.

In addition to building up cash, you can consider other steps to cushion some of the market’s unpleasantness:

•Invest in funds that have plenty of cash on hand. The American Funds American Mutual fund, for example, is a large-company, bargain-hunting fund with about 12.4% of its $20.3 billion in assets in cash. The fund fell 9% this year through Tuesday, about 1.5 percentage points less than the S&P 500 at that point.

•Look for funds that seek bargains, particularly among large-company stocks. A big company can weather a downturn better than small or midsize ones. And value funds buy stocks that have already been beaten up. In theory, those stocks won’t be clobbered as hard in a market rout.

For the most conservative investors — savers — the current options aren’t very enticing. A five-year Treasury note now yields just 2.73%. Consider a high-yielding bank CD. National Bank of Kansas City is offering a 21/2-year CD that yields 4%, according to Bankrate.com.

Rodriguez isn’t concerned about getting a big return from his cash position. He just wants to avoid further losses. “This crisis can morph and expand in ways that none of us can truly expect,” he says. “People have been asking us, ‘When do you think we should start buying?’ ” A contrarian, Rodriguez says the time to start buying is when people start asking, “Is it too late to sell?”

ADD BOND FUNDS AND STIR

You might think about building up cash and bonds in your 401(k) portfolio to dampen volatility. A basic moderate-risk portfolio, says Evensky, the Coral Gables planner, is a mix of 40% bond funds and 60% stock funds.

Stovall

Still too much volatility? Add more bond funds. Or if you want the potential to make more money — and can tolerate more risk — boost the weighting of stocks or stock funds in your portfolio.

Standard & Poor’s uses a variation of this in its model portfolio, which divides money among stocks, bonds and cash. You can use the same model as a guide for your 401(k) portfolio, using an S&P 500 index fund for the stock portion.

S&P’s model portfolio is now 55% stocks, 25% in bonds and 20% in money market securities. That allocation is 5 percentage points lighter in stocks than normal. (S&P recommends that 15 percentage points of your stock allocation be in international funds.)

Sam Stovall, S&P’s chief market strategist, says he thinks stocks are near their bottom. One reason: The Fed is cutting rates, and that’s generally good for stocks. “Of the 11 times that the Fed cut rates since 1945, the stock market has been higher 12 months later,” Stovall says.

Moderate investors might also consider:

•Defensive sector funds. Not all parts of the stock market are smacked equally hard. People still need electricity in a recession, for example, so consider utilities funds. Health care funds are another defensive favorite; people still get sick in recessions.

•Rebalancing strategies. If you’re following a basic plan and have absorbed severe losses recently, your best strategy is to rebalance your 401(k) allocation. That means taking money from your winning investments and pouring it into your losers. Say, for example, you aim to keep 60% in stock funds and 40% in bond funds. The recent stock meltdown has changed your portfolio to a mix of 50% stock funds and 50% bond funds. It’s time to sell enough of your bond holdings to raise your stock allocation back up to 60%.

“Rebalancing forces you to do what’s emotionally uncomfortable,” says John Nersesian, managing director at Nuveen Investments. It requires you to sell high and buy low.

“It doesn’t matter how often you do it; it just matters that you do it,” Nersesian says. Over 25 years, rebalancing a basic mix of stock and bond funds has improved returns and reduced volatility, he says.

DON’T CRY; BUY

If you can tolerate risk, volatile markets such as the current one create rare buying opportunities. One technique: Buy more of stock funds you own that have been clobbered. If you liked a stock fund at a higher price, you should like it more at a lower one.

Gittings, 2005
Byrne

Susan Byrne, manager of WHG LargeCap Value fund, uses a similar technique. She’s putting some of her fund’s cash into stocks that “have just been smashed,” she says.

What if you’re fully invested in stock funds? If you’re in a taxable account, you can sell some losers and take the tax loss.

And don’t rule out international funds just because they’ve sunk this month, after sizzling last year. International markets account for nearly half the world’s stocks; you could be missing gains by staying solely in the USA.

Tom Marsico, founder of the Marsico funds, is looking at stocks that will benefit once the economy turns around, such as railroads. “It’s a broad way to play a generalized improvement in the economy,” he says.

You can find such stocks in many large-company growth funds. These funds look for stocks of big companies whose earnings growth should soar. Among such funds you might find in your 401(k) plan: The American Funds Growth Fund of America, Fidelity Contrafund and American Century Ultra.

If you’re really aggressive, consider a midcap growth fund. Midsize companies have the potential to grow faster than, say, Microsoft or Intel. Baron Asset fund, Janus Orion and American Century Vista are midcap growth funds you might find in your 401(k) plan.

Kshitij Deshmukh, 26, a graduate student at Penn State, has about 70% of his savings in stocks, and he’s not bailing out of the stock market. But Deshmukh isn’t ready to start looking for bargains, either, because he thinks the market has more room to fall.

“If downward pressure on stocks continues to persist, then I think we will see a small and slow uptick,” he says. “That will create a better buying opportunity.”