Monday, February 15, 2010
Shield your savings from a double-dip recession....
Answer: If you're asking whether if it is right about your concerns that the political situation will lead to another recession, then the answer is, Who knows?
Considering the beating it's taken, the economy seems to be bouncing back pretty well so far. The recovery at this stage looks as strong as the recoveries after severe recessions in the early 70s and early 80s. That said, the news as the economy climbs out of a recession, particularly a severe one, is usually mixed reaction with both positive and negative developments. So it's hard to say at this point whether the recovery could stall or even reverse, whether due to the global political situation, deteriorating fundamentals or both.
Whether it is right to liquidate your mutual fund portfolio and essentially hunker down in cash and an annuity because of fears, the more direct answer: No, that doesn't sound like a very good idea.
One reason is that, as a rule, investors should not make drastic moves with their investments. Radical shifts are usually triggered by the gut, not the head, and acting on emotional impulse is a notoriously bad way to handle your money.
Besides, even if your actions are based on rationale rather than emotion, there are doubts about such planned move. Getting it right when predicting trends in the economy is difficult even for economists. So for any investment strategy in such a heavy-handed manner to make a bet on one particular economic scenario playing out is seen as not very prudent.
It's a mistake to let emotions dictate your investment strategy, you should take them into account when investing money. You can't live your life feeling you're teetering on the precipice of financial disaster. So if it is really some concern about the damage your retirement portfolio might sustain if the market heads south, we ought to address those concerns, but in a more thoughtful, methodical way.
Say you are in your late 60s then you're looking to your investments to support you throughout retirement, which, given your age could easily be another 20 or more years.
That means that, unless you've got a ton of money socked away, putting virtually all of it in cash (the annuity excepted) would probably make it difficult for you to get sufficient income that will both last the rest of your lives and stand up to inflation over the long run.
In short, it's very likely that you should be investing at least some of your stash in a diversified portfolio of stocks and bonds that can generate some long-term growth. The trick is to get some growth, but not so much that your stomach flutters every time the Dow takes a hundred-point dive.
Achieving this balance of growth and safety will depend, among other things, on how much income you need from your investments, your tolerance for watching your portfolio's value fluctuate and how much room you have for paring living expenses should investment values take a hit.
Now, about that annuity. Making an immediate annuity part of your retirement portfolio could make sense in your situation for two reasons. First, the steady income, which you get regardless of what the market is doing, may allay some of your anxiety about the economy and the markets. That, in turn, may make you less apt to batten down the hatches in cash and more inclined to devote at least a portion of the portfolio to investments that can generate growth.
Second, combining an immediate annuity with traditional assets like stock and bond funds can actually help your retirement savings last longer, which is a definite plus for retirees.
The bottom line is that whatever you end up doing, you should do it based not on some vague notion of what the political situation may do to the economy. Rather, you should make a plan after considering several alternatives and seeing what effect those different choices might have on your ability to live off your investments the rest of your life.
Labels: Investment Pointers