So, I happen to be in the over 50 category. Last spring after reading the book The Trillion Dollar Meltdown (which PublicAffairs will be bringing out soon in paperback, renamed The Two Trillion Dollar Meltdown), I decided to move some of my IRA money that was invested in one of those age-appropriate retirement mutual funds (so, supposedly, they are watching how the portfolio should be balanced) into a money market fund. I told my banker-son that I was going to do this, and he told me not to do it. But I did it anyway. A money market fund still didn’t feel really safe, but it seemed like the best answer under the circumstances. But I still have other money in that retirement mutual fund… Now I guess we’ll see if the money in the money market fund is the extent of my retirement funds.
The website for the company that runs my money market fund says that they are going to take/accept the new “insurance” for money market funds, and that the insurance will only last for 3-4 months. Had you heard that?
Hmmm... Treasury Bills are safer than the money markets these days — if you can make the move now, I’d do it. Much better to avoid potential losses than to have to file a claim. There are Treasury Bill ETFs available. Try PLW, the PowerShares Laddered Treasury ETF. You can also check out iShares.com, AMEX.com, PowerShares.com to see what other Treasury Bill options are available.
With regard to the rest of your mutual funds. Check out the pie charts in the article, "Bill and Nilo Bolden’s Very Healthy Nest Egg (and How You Can Have One, Too!)," from the October 2008 ezine, vol. 5, iss. 10, at NataliePace.com.
Investing in mutual funds means that you don’t really get the benefit of having the diversification across those industries, sizes and styles. Doing that kind of investing and meeting with a CFP twice a year means that you would always be protected from boom/bust cycles because you would be taking profits and redistributing them (called rebalancing). In that scenario, you are able to buy low and sell high into funds, without too much trouble.
For instance, if you had 6.25% in small caps — 12.5% total because you have small cap value and small cap growth — prior to 2000, when you met with your CFP in January 2000, you would have seen that your small caps (NASDAQ DOT COM STOCKS) had swollen to become 50% of your portfolio. You could have sold some of those funds (for a great gain!), redeployed the money across your blueprint (keeping % equal to age safe and the rest diversified by industry, size and style), and you would have been VERY protected from the DOT COM BUST. You would also have been buying LOW into the Dow Jones Blue Chip stocks (the large caps) because those would have shrunk a bit. (Incidentally, the Dow performed MUCH BETTER than NASDAQ 2000-2002). So this kind of diversification really works great, especially combined with two meetings a year with your CFP to rebalance, redistribute and make sure that you are aligned with your Buy My Own Island investment blue print.
Essentially, you are the architect of your dreams and the CFP is the builder. My book, fortunately, helps the average person be a better architect. There is a new trend in brokers where they are paid on money under management (even at some of the discount brokerages), which is more in line with the best interests of the investor — but this was NOT the case in the past, when brokers were paid on commissions for the mutual funds they sold. The trend is just beginning so it is vital that investors know how to protect and grow their own nest egg — AND how to pick a great certified financial life partner. You can get tips for this in the “How To Find a Broker” article, under the Investor Edu section of NataliePace.com.
Now, in the “have a little faith department,” there are two points. One: The markets return on average over 11% per year, including bear markets, recession and the depression. So, provided you don’t have to retire tomorrow, your portfolio could still recover. It will recover more quickly if you have diversified investments, and particularly, if you include clean energy in your portfolio. Clean energy (solar, wind, electric cars, etc.) was the top performing industry in 2007, earning almost 60 cents on the dollar — almost double the returns of oil!!!
Roger and I are working on a way to get more of this information to your team. So, keep asking questions because they may well form the basis of a great Q&A that benefits everyone around you.
Unfortunately, not all of the old school mutual fund companies offer the new targeted funds — like ETFs do, so it may require having HR take a serious look at what the options are, and perhaps consider a new company with fund options that allow people to diversify better.
3 comments:
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Thanks for the response to my money email. I have been eyeing treasuries, and I’ll probably move some money there soon. I’ve ridden out a number of downturns in the past, and I agree that that is usually the best answer. However, this situation feels different. But most of us don’t have much choice other than to ride it out when large portions of our money are tied up in various retirement vehicles (401Ks, IRAs, etc.), where investment choices are limited and where there will be penalties if we just withdraw the money.
Thanks for your advice and suggestions!
You can roll over your IRA to a brokerage with a much wider range of products (including the ETFs that I'm talking about) without penalty, and believe it or not, there are certain qualifying events where you can even do it with your 401 (k) even while you are still working for a company. It is well worth it to check this out.
ETFs are the preferred vehicle over mutual funds for many reasons, some of which are outlined in my blog and in the article Bill and Nilo's very healthy nest egg. However, mutual funds were the way things were done in the past and a lot of companies have been slow to respond to the wave of change. Kind of like GM making the Hummer when people were shifting toward the Prius. So, you would be greatly served to check into new options, interview some new brokers at brokerage houses that offer a wide range of ETFs (as many of the online discount brokerages do) and ask about rolling over your IRA and 401 (k) without cashing out and without penalty. Also, if your current 401 (k) options are not working for you, chances are they are not working for many people in your company. So, a call into your HR team is certainly appropriate.
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