Financial Friday - Q & A

We are going to start with some basic investing principles. There are short term money concerns as well as long term money concerns. So your portfolio planning should consider them both. This is not to be considered advice and before you make any financial decisions - make sure you contact a financial professional to discuss your specific financial situation. This blog is for educational purposes only.

Before you make any financial decisions you should always consider your time frame until you need the money, risk tolerance - how much do fluctuations affect you, and make sure you are in a well diversified portfolio.


Short term goals:

3 - 6 months of living expenses for emergencies. This should be in a savings account. This is called liquid money or cash because it is easily accessible.

Any money you will need in the next 2 years should also be in a savings account. You don't want it subject to market fluctuations. So if you are buying a house, car or have a planned large purchase - the money should be in a savings account. Don't try and get a big return in the stock market because if the market goes down you may not have the money when you need it.

Money you may need in the next 3 - 5 years can be in a low volatility fund - such as a bond mutual fund or an asset allocation fund - like a balanced fund. (mix of stocks - usually large size companies and bonds). There is more risk in this type of investment vs savings accounts or cd's, but it does give you more growth opportunity.


Money you won't need for more than 5 years can start to assume more risk. Normally, it takes at least 5 years for the stock market to rebound from a down turn. Below I have different types of portfolio allocations.

Long Term Money:

Money that you are saving for retirement can take on more risk depending on your time frame. The longer your time frame until retirement the more stock you can have in your portfolio. You have other concerns besides the stock market going down. You need to be concerned about inflation, increased health care costs, and potentially no pension or reduced social security benefits. Historically, the stock market has returned the best long term returns.

There are different types of portfolios:

Portfolios should be a mix of large, mid, small and international stocks and mix of government, corporate, investment grade, and high yield bonds

Aggressive growth - has approximately 85% stock mix and 15% bonds
Growth - 70% stock mix, 25% bonds, 5% in cash
Balanced - 50% stock mix, 30% bonds, and 20% cash
Conservative- 20% stock mix, 50% bonds, and 30% cash

The longer your time frame the more risk in the stock market you can afford take. Sites like Fidelity Investments and Vanguard do a good job of explaining simple investment concepts and even have questionnaires you can go through to help determine your best options.

Question:
Thanks for coming it was great to hear the presentation. A couple of days before you gave your presentation for Sig Ep I had walked into my bank (knowing that is was a FDIC institution) and put the majority of my savings (approx. $7500 in total) in a 'laddering' of CDs ( a 6, 9, and 14 month). I have had the money sitting in low interest savings accounts but am scared to put it into the market (especially with the current conditions). Was this the right decision and what should I do with my money when it matures? You kept presenting the opportunities to invest at 8% returns. What is a feasible avenue that a college age student can go through to seek such a return.

Answer:

Again, I always defer you to a financial professional who knows your entire situation to guide you. But basic rule would be......

If you need the money for school in the next few years - you are on the right track. Keep the money very safe (FDIC insured savings accounts or cd's) CD's will normally return a little more money than a traditional savings account but you have to be sure you will not need the money prior to it maturing. You do not want to assume any risk on money you will need in the next few years!

However, if this money is for retirement than you may want to consider getting into the market in a well allocated portfolio. Firms like Fidelity, Schwab and Vanguard offer funds that are based on Time Frame until retirement. They are very easy to invest in and they are great for novices or people who do not want to worry about rebalancing their portfolios every year on their own. They help individuals from making common investment mistakes.

The 8% return that was discussed in the presentation was an assumption for a long term portfolio in a well allocated stock/bond mix over a 40 -50 year time frame. When investing in the stock market for the long term - 2 things are happening:

Money will compound over time - you invest money, you have your gains reinvested into the principle amount - which increases the amount that is now working for you. So you invest $1000 and you get a 5% return. Now you have $1050 dollars working for you...

Dollar Cost Averaging - hopefully, you will be adding to your account on a regular basis. As you are buying into your investments - you are buying at different prices depending on if the market is up or down since your last purchase. Over the long term this is a very effective way of building wealth over time.

The 8% discussed was a reasonable assumption over 40 -50 years of investing. The market may be up 10, 15% or more some years and down 10, 15 % or more other years. Over the long term of contributing on a regular basis, and keeping your portfolio mix correct for your risk tolerance and time frame - from a historical standpoint 8% is reasonable.

Keep the questions and comments coming! I want to know what is on your mind so I can address the issues that are most concerning to you!

Stay tuned........