Investor Advice From the Motley Fool
We called Alexandria-based Motley Fool, which has been advising individual investors like you for 15 years and asked senior analyst Tim Hanson our Wildly Popular Five Questions:
1. What's the one thing individual investors should keep in mind during these turbulent times?
Hanson: Don't panic. While this may seem like a once-in-a-lifetime event (and in its intensity, it's getting close), the fact of the matter is that the stock market cycles through boom and bust every eight to 10 years or so. Our economy has a 100 percent record of recovery, and though it will take some time to sort through this housing/credit/economic crisis, we'll get there in the end.
So, stay stoic with your money and be careful not to let emotion trump your sound long-term, asset-allocation strategy. If you don't have an asset-allocation strategy, now is a very good time to put one in place.
If you're young, that means sticking with the stock market and buying more stocks today. If you're closer to retirement, that means making sure you're protecting your principle by owning something like Treasury Inflation-Protected Securities, or TIPS.
2. Is there any such thing anymore as a "safety stock?"
Hanson: In the short-term, there is no such thing as a "safety stock." But that was never the case. If you're willing to take a long-term view, however, there is no better place for your savings than in the stock market. And despite recent volatility, that's still the case today. If you want a simple solution, then you should do just fine by sticking with an index fund such as Vanguard Total Stock Market (VTSMX).
But if you are looking to really take advantage of the current crisis, we've been telling our Motley Fool members to start increasing their foreign exposure as high as 50 percent to 70 percent. A host of other financial experts have also come out recently with similar recommendations. And that's because the nature of the global economy is changing. The U.S. is becoming less central to trade and development and countries such as China, India and Brazil are both growing faster and offer important diversification. Remember, if you're a U.S. investor, it's likely that the value of your savings, home, and job are all denominated in U.S. dollars and rely on the health of the U.S. economy. (Note: Hanson does not own shares of VTSMX.)
3. Some advisers are encouraging people to take 10 or 20 percent out of their stocks and put it in an interest-bearing savings account. What do you think?
Hanson: That depends on when you need the money. If this is cash that you've had in the stock market but that you need to pay your bills over the next 12 to 36 months, then yes, put it in a savings account or in something like TIPS. You need to make sure it's there when you need it. (Incidentally, that money should never have been in the stock market in the first place.)
But if this is money you're saving for a retirement that's five or more years away, then I would keep it in the stock market and take advantage of current volatility to upgrade your portfolio. That means adding new money to the market and reallocating your portfolio into the best-priced, strongest names.
4. I was thinking about doing some home renovations. Should I go ahead or not?
Hanson: Again, that depends on your individual situation. My wife and I are actually planning on doing something with our basement in the near-term, but we've dialed back our plans. If you have the money and believe that the improvement would benefit your quality of life, then go ahead. But if you're hoping to renovate to increase the value of your home, then I'd reconsider. Home values are going to continue to drop in the near-term, and you may not recoup the money you thought you'd been "investing" in a renovation.
5. What should I do with my retirement accounts if I plan to retire in five years? In 10 years? In 20 years?
Hanson: If you're retiring within the next five years, I'd make sure you have a sound asset allocation strategy that has your savings stashed in 70 percent to 80 percent bonds and treasuries and considerably less in equities. That's because you're going to need that money soon and want to protect the principal.
If you have 20 years or more, I'd still be tilting heavily toward equities (and particularly toward foreign stocks for the reasons I mention above), and be regularly saving and adding new money to the market.
If you're in between, I'd take a look at my portfolio to make sure I'm comfortable with my asset allocation plans. You have some flexibility when you're 10 years away from retirement, but you want to make sure you have a healthy mix of equity and non-equity investments.
If you're looking for greater detail on the percentages that could be right for you, I'd consider putting the cash in a Target Retirement fund, which will allocate it for you based on your time to retirement, or take a look at how these funds are allocating their assets and then make sure you're not too far off in your own portfolio.
-- Frank Ahrens
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