Investing amid all the recession buzz
Don't let chatter about the current economic climate color your long- or short-term investment decisions, says Money Magazine's Walter Updegrave.
NEW YORK (Money) -- Question: My wife and I have about $50,000 to invest, some of which will go toward a new home we plan to buy within two years and the rest toward retirement. Given all the recession buzz, we're wondering which investments have the best outlook over the next couple of years. Should we get into emerging markets funds to capitalize on a weak dollar? Buy a large-cap stock fund that can ride out problems with the economy? How about bond funds or CDs? --Matthew Beck
Answer: I'm glad to see that the steady drumbeat of dismal economic news hasn't scared you and your wife from investing. But unless you revise your approach, I'm concerned that you could end up squandering much of that fifty grand.
Let's start with your premise - namely, that the "recession buzz" should dictate what investments you buy. Granted, most of what you hear from pundits and read in news reports makes it seem as if we're definitely headed into a recession, which is generally defined as the economy shrinking in two consecutive quarters. (You can get a more comprehensive definition by clicking here.)
But it's not a given. And even if we do slip into recession, it's possible that a combination of the Fed's rate cuts and some sort of economic stimulus package like the one being bandied about now could make it shorter and shallower than it otherwise might be.
So the idea that anyone is going to cut through all the uncertainty, map out the path the economy and the markets will take over the next year or two and then use this incredible foresight to jump into the best investments at the right time is unrealistic - and financially dangerous.
So, having said that, what's my suggestion?
Let's start with your house money. If you're really going to buy a home within two years, you'll want to take whatever portion of your fifty large is earmarked for your new digs and invest it in something secure that will hold its value if the market tanks, such as a money-market fund or CD. You're not going to earn much on this money. Both short-term CDs and money-market funds have recently yielded in the neighborhood of 4% (and could continue to fall).
But the point isn't to maximize your return on this money. It's to make sure it will be there for you when you're ready to buy your home. If you invest your house stash in stocks and the market is way down when closing time rolls around, you might not have enough cash to seal the deal.
Investing for the long term
When it comes to your retirement investments, however, you don't need to be as concerned with the short-term gyrations of the market. You'll be investing this money for a very long time, so you can afford to shoot for higher returns. In fact, you'll need to if you want a decent nest egg for retirement.
But you don't want to shoot for those higher returns by engaging in a guessing game about which investments might thrive under a particular scenario. Rather, you want to settle on a mix of stocks and bonds that will allow you to participate in the long-term gains stocks have historically generated, yet also offers some shelter so your portfolio isn't decimated if the market goes kerflooey.
Generally, the younger you are, the more you want to tilt that mix toward stocks. When I say stocks, I'm talking about stock mutual funds for most people, and a diversified blend of stock funds at that - some large-cap, some small-cap and a dollop of foreign stock funds as well.
Within that foreign category, you could include the emerging market funds you asked about, but be careful. These funds tend to rattle off huge gains for several years and then go into deep slumps. (Indeed, if emerging markets funds' recent returns are any indication, they appear to be heading into one now.) So you shouldn't invest in them unless you're willing to ride out some long down periods and even then you probably don't want them to represent more than 5 percent or so of your overall portfolio.
You'll find recommendations on how to invest your retirement stash at different stages of your career by clicking here. As you review these guidelines, be sure to also consider what I call the "gut factor." If seeing your retirement stash get whacked for a substantial loss even for just a short time would start your stomach churning, then you might want to dial back your stock exposure a bit. If you're more steely nerved, on the other hand, you could boost it.
Once you decide on an overall mix that's right for you, don't go fiddling with it every time the economic outlook changes or the market soars or dives. Stick with it, except to rebalance once a year. (For more on how to rebalance and what you gain from doing it, click here.)
Finally, you can put together a retirement portfolio on your own by choosing funds from our Money 70, Money Magazine's list of recommended funds. I'm a fan in particular of the low-cost index funds on that list.
Or you can take a much simpler route by investing in a target-retirement fund. Just choose a fund with a date that corresponds to the year you intend to retire, and you get a ready-to-go portfolio that includes a mix of stocks and bonds appropriate for someone your age. (To check out the target-retirement funds that made the cut for the Money 70, click here.)
But whatever you do, don't get fixated on the recession buzz. A buzz is a distraction, not a basis for an investing strategy.
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