Dow 13,000: Time to jump back into stocks?
DOW 13,000: Time to jump in? / CBS
As the Dow Jones Industrial Average inches closer to the psychologically important level of 13,000, the S&P 500 reclaims almost all of the losses sustained since June 2008, and the NASDAQ nears its highest level in a decade, the chorus gets louder and louder: "Is it time to get back into stocks?" This is a particularly thorny question for any investor, but the stakes are especially high for retirees.
I want to address two particular groups who are wondering whether to jump back into stocks: The "I'm sick and tired of low interest rates" retirees and the post-financial-crisis stress disorder sufferers.
Low interest rates. The Federal Reserve has kept short-term interest rates at the current level of zero to a quarter of a percent for more than three years, and in its last meeting said that low rates could extend through 2014. For people who have worked hard and saved their entire lives only to enter retirement amidst these low interest rates, it has been a brutal period. The further away we get from the financial crisis, the more people begin to test their risk appetites and nibble on stocks.
While I am a big fan of diversified portfolios and truly believe in the long-term performance of stocks, I want to remind savers that you are likely in cash for good reason: You really don't like risk. But the risk-averse can still stay the course, while trying to squeeze out a bit more money. One of my favorite websites for finding good interest rate products is depositaccounts.com. Check out some longer-term CDs with low penalties, and shop around at credit unions that offer better interest than most banks. Although rates are low now and could remain so for another year or two, most believe that interest rates will be headed higher over the next decade, so patience will serve you well.
Post-financial-crisis stress disorder. Lots of people couldn't stomach the stock market in 2008-'09 and they bailed out. If you fall into this category, it might not be prudent to jump back in -- after all, stocks are still a volatile asset class, and it's possible you just really don't want to go on that ride again.
But if you realize now that you made an emotional decision by selling out and need a way to get back in, do so with some purpose in mind so that you don't make the same mistake again. Start by taking a risk-assessment quiz. Given the ups and downs of the past four years, you're likely to know exactly how you felt about market swings. Most retirement plans and mutual fund companies have risk tests available online.
Once you complete the test, most sites will recommend a portfolio allocation with funds that match your feelings about risk with your investment time horizon. If you are sitting on lots of cash and are afraid to make the jump all at once, choose a fixed percentage of your account to reach your desired allocation. If you are a balanced investor, maybe allocate 10 percent a month to stocks for 5 months until you are 50 percent in stocks. Once you get there, stick to your plan; otherwise, you will continue the terrible cycle of selling low and buying high.
Always remember to rebalance so that your allocation remains in check. This isn't easy; it requires that you sell winners on the way up and reinvest the proceeds in the areas that have done badly. But just imagine if you'd been rebalancing at the end of 2007 and selling stocks and buying bonds as we headed into the crash!
If you are rotating back into stocks, make sure that you have enough cash to cover your needs. For retirees, a good rule of thumb is to keep one to two years of cash needs in cash or cash equivalents, so you aren't forced to sell assets at the wrong time.
Distributed by Tribune Media Services, Inc.
Popular on MoneyWatch
- Reverse cell phone lookup service is free and simple
- Chrysler expected to make Jeep recall refusal official
- Chrysler agrees to recall of Jeeps at risk of fire
- 6 ways to pay off your student loans
- Why geniuses don't have jobs
- Chrysler continues its refusal to issue a Jeep recall
- Top 10 professional life coaching myths
- The Internship: 6 real-life lessons from the movie