With market indexes hitting all time highs these days, it’s tough to know what to do with your money. If you are sitting on $5,000 or $10,000 (or more) you are probably wondering what to do. Who wants to invest at the top and then get whacked by a downturn? Nobody. On the other hand, you certainly don’t want to miss out if the market continues to do well.
First, let me explain that there are two different investment approaches – technical and fundamental. I provided a full explanation of these terms at the link above and I encourage you to read the article.
So why am I writing about this now?
Well, I received a particularly well thought-out email from Dan, a Wealth Pilgrim from the East, that made me think about the dilemma that many investors find themselves in:
“I’ve been getting a bit leary. I’m always nervous when things start getting too good. I really don’t want to lose what I’ve gained. And I’ve got about $10,000 in cash that I don’t know what to do with.”
“I sure don’t know what ‘smart money’ really means right now, but I certainly do not want to revisit the situation of several years ago and feel dumb.“
Dan isn’t the only one with questions like these. And for people who are retired or getting ready to retire, the question becomes even more important.
I believe that the only sensible approach is to re-visit your core goals. If you are young, what difference does it make what happens to your money this year? And if you are retired and want your money to last at least as long as you will, think about your lifespan as your investment horizon. It’s really impossible to know what the market is going to do in the next day, week, month or year. If you try to outsmart this market – good luck. Here’s an approach that is probably more likely to serve your needs:
1. Make sure your investment mix balances your long-term goals with your short-term appetite for risk.
Forget about this particular $10,000. Think about your overall picture. If you decide to ratchet risk down by diversifying out of stocks, do so with (at least) a 10-year game plan in mind. And if you do ratchet the risk down, please don’t compare your returns to the market – especially not on a monthly, quarterly or annual basis. You can’t have your cake and eat it too. 🙁
2. Keep withdrawals under 4% for now.
If you can keep your withdrawal rate to 4% or below in this market, I believe you are in fine shape (I can’t promise this…but history is on my side). So, if your portfolio is $100,000, your maximum withdrawal for the year should be no greater than $4,000. If you keep to this limit, the chances are good that you will be able to continue making these withdrawals without jeopardizing your retirement nest egg.
3. Play the odds.
Investors suffered over the last decade. Stocks actually had a negative return between 2000 and 2010. Please understand that this is a rare occurrence. This decade is looking pretty good so far but that’s no guarantee either. The odds are, if you invest for an extended period of time, you’ll do quite well. Good times Pilgrim!
4. Ignore the news.
I could be wrong on this. I’ve been wrong before. But I suggest you ignore the news. That includes talk about “all time highs”. Historically, more money has been lost anticipating a bear market than in a bear market.
I happen to know Dan and I know he’s got a strong investment approach. Stick to it, Wealth Pilgrim of the East. The road ahead will likely be an uneven one. It will be rough at times no doubt, but you’ll arrive at your destination quicker and safer if you follow your road map.
Bottom line? If you have extra cash right now, think about your overall approach now and put the money to work according to your plan and investment approach. You’ll be better off than by making an emotional decision based on your assessment of where the market is.
What other options does Dan have? Would you echo my suggestions or do you think he should take another route?
Ophelia Parker says
I can’t disagree more because stocks are not guaranteed to generate profit unless you have 100s of 1000s in your pocket. I don’t think so it’s much different than real estate.
Neal Frankle, CFP ® says
You are right, stocks are not guaranteed – but they aren’t guaranteed no matter how much money you invest. But thanks!
Neal Frankle, CFP ® says
Well….we don’t agree but I appreciate your comment. Thanks!
chuck wintner says
Neal, you are so increibly on target with your subjects, it’s like you are living in my head.
Fidelity Investments has just opened a new fund: commodities, meaning raw materials in general, not just gold and oil. It was created exactly for the reasons that your article stated: a hedge against inflation. I had been thinking of it for my kids’ porfolios with new money that they earned in their summer jobs, but now your article has me wondering. What do you think of the idea?