If you feel jittery after the events of the week of Sept. 15, you are not alone. The sell-offs we experienced and then the buy-backs show how quickly many people react to the changing news regarding the market. However, having a basic understanding of the market and a good plan for the future should help to reduce the stress and keep you focused on where you are headed – RETIREMENT!
Valerie RumboughUnderstanding the market – Since 1929, there have been several market swings, but not long after a plunge in market values, there has been an upswing that more than recovered the drop in value. There are several keys to surviving the swings. First of all, be sure your investments are diversified – in other words, don’t place all your eggs in one basket. Currently, the banking and housing industries are not doing so well. However, the oil industry is doing great. An investment portfolio with stocks in many industries will not swing as wildly as one that is concentrated on one or two. Diversification in investments also includes a mix of different asset classes, such as small companies, large companies, international investments and bonds. How do you know what to invest in to get an adequate mix? Begin by investing in several indexed mutual funds. They represent many different companies and industries, so your investments are automatically diversified, regardless of their size.
Keep focused on your goals – Do you know what your goals are? Are you retiring in five years, or 20? Knowing when you will begin to use the money you are saving is key to determining how to invest it. For example, if you are in your 20s or 30s, you can afford to take risks and invest almost entirely in stocks, because in the 30 to 40 years you have before retirement, your opportunity to earn good returns is greater than your risk for a drop in market values. However, as you get closer to retirement, your risk tolerance is lowered, so a more conservative investment portfolio is warranted. How do you know what to do? A general rule of thumb is to start shifting your portfolio slowly from stocks to bonds when you are within 10 years of retirement. Your shift can be gradual, so that by the time you are within two to three years of retirement, you have most of your portfolio in safer investments. Depending on the value of your portfolio and your income needs, you may want to keep between 10-20 percent in stocks, to keep up with inflation during retirement. Some companies offer funds that make that decision for you – shifting your portfolio automatically as you get closer to retirement. Be aware, however, that these funds are more expensive than doing it yourself. Also, they tend to be more on the conservative side. Another rule of thumb is to check your portfolio regularly. That does not mean daily. That will only cost you more, because you will be spending more money on antacids! You should, however, check them at least once a year to determine if the market value and investment mix is close to what it should be relative to your goals for retirement. You may find that you need to invest a little more to catch up, or that it’s time to begin shifting your portfolio into different investments. This is not the time, however, to panic if the market has behaved badly. It may just mean that you wait it out until the market recovers, then check again in a few months.
What if you plan to retire within two to three years, and you didn’t do any of this? If you are in this situation, by all means, don’t panic. Keep your portfolio intact for now, and wait for a rebound in your portfolio value before shifting. Place current and future contributions in safer investments. If you have several more years before retiring, now is the time to invest as much as you can in the stock market, keeping in mind the things already discussed above. What if you are not sure how to do any of this? Consult a financial planner and/or a CPA that you can trust. The Baptist Foundation of South Carolina can also help you with basic advice and planning if you have charitable goals in mind for your financial and/or estate plans. Above all, remember that the Lord is also Lord of investments. Study his word regarding investments, debt, saving, estate planning. You will find the answers there!
Editor’s note: Rumbough, CPA, CFP, is vice president of finance, Baptist Foundation of South Carolina. For more information, call (800) 723-7242.