Mary Rowland Personal Finance Column—June 2009
Invest for Success (and the Life You Want)
The first quarter of 2009 turned out to be the scariest time I can remember to be a stock investor. OK. The last quarter of 2008 wasn’t so great either. Even some of the pros who work for big mutuaI fund companies and other financial institutions sold off parts of their portfolios when the market, as measured by the Dow Jones Industrial Average, hit 6,469.95 in March, down more than 50 percent from its high of 14,164.54 in October 2007.
Financial planners told me that their clients were terrified. “They thought the market was going to go to zero,” one advisor said. But whatever we did during the market plunge, we all must get back into the market now. And not just because the Dow rallied nearly 2,000 points in March and April. But because investing is no longer optional for Americans. Thirty years ago, most Americans did not invest. They saved what they could, patched together what they could find and made do on that, on help from families and what they got from Social Security in retirement.
Today, everyone must invest. You must invest if you are to reach for your dreams, if you are to have the life you want. You must invest in case you lose your job or become divorced or widowed or want to educate your children. And, of course, you must invest to have the money to do the things you want to do in retirement. Successful investing requires a plan and a strategy. Anyone can learn enough to become a good investor. Two good sources of information are: www.bloomberg.com and www.morningstar.com.
If you are just starting out, what you need most is discipline. Set up a plan to invest a certain amount of money each month. Take it from your paycheck if you can. A tax-deferred plan like a 403 (b) plan works particularly well for young people because the money is deducted from your paycheck before you ever see it. This is a great time to get started as an investor because the market has gone through such an extensive housecleaning. Time is on your side, and time is an important measure of wealth.
For you, the key to investing in stocks is to avoid making irrational decisions. That’s it. Choosing individual stocks is difficult. I don’t recommend it. Instead, choose a broad-based mutual fund or an index fund that represents the entire market—such as a fund that invests in the Standard & Poor’s 500 Index. That way you spread your risk among many stocks and your investment will do as well – or as poorly – as the overall market.
If you are at mid-career, you have time to make up for the losses you may have experienced in the market crash. If you already have a portfolio of investments in your 403 (b) plan or in a taxable account, don’t be quick to sell them off. Wait! Plan your strategy.
Individual stocks have always been risky, but never more than at the end of 2008 and beginning of 2009. Consider the stock of AIG, a triple A-rated insurance company that sold for $49.50 a share in the spring of 2008 and sunk to 33 cents a share in spring 2009. I know the gory details because my husband is a stockholder!
That’s why I suggest you put new money into a mutual fund or one of the exchange-traded funds (ETFs). Like a mutual fund, ETFs contain a basket of stocks sliced up into individual shares. Most of them follow indexes that allow you to pick a market segment, such as developed countries outside the U.S. or emerging markets or the U.S. stock market. But unlike mutual funds, they trade on a stock exchange so they can be bought and sold all day. At the end of 2008, there were 728 exchange-traded funds (ETFs) holding $531.3 billion in total assets.
Another lesson I hope we learned from the crash was to keep near-term money liquid in money market funds. Too bad I didn’t learn that lesson before I had all of my son’s college money invested in two funds that lost 50 percent of their value just as I was counting on that money to pay his college tuition.
If you are nearing retirement or already retired, you face two big dangers. The first is that you will invest too aggressively to try to make up for recent losses. Don’t do it. Don’t act on impulse to change your portfolio. Plan—with help, if you need it.
The second danger is that you will determine to never go near the stock market again. This, too, is a mistake. New retirees can expect to live 20 or 30 or more years in retirement. You need stocks in your portfolio to keep up with inflation. Again, I recommend a broad-based index mutual fund or ETF that will go up and down with the overall market.
In addition, those close to retirement – or already retired – should raise at least three years worth of cash in their portfolios. You don’t want money you need in the short-term in the stock market. If you don’t have that, put new investment contributions into a money market fund until you meet that cash threshold.
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Mary Rowland is a nationally known business and finance writer. The former personal finance columnist for the New York Times and former co-host of a nationally syndicated radio show, Ms. Rowland is the author of several investment books and speaks regularly to consumers and financial planners about investing and personal finance.