Q.The volatility of the stock market really has me spooked. I have a stock mutual fund at an online broker, but I'm thinking of pulling that money out of stocks and putting it into a CD for safety.
Most of my retirement money is going to come from a pension plan which pays a set rate of income; but outside of that, this investment money is some extra savings I've put aside to supplement my retirement income. I'm retiring in a couple years, and I don't want to risk having the market fall apart on me between now and then. Do you think this is a good time to go from stocks to a CD?
A. Your concern is understandable, given the big hits the stock market took in the latter months of 2018. If you are planning to use most or all of your investment dollars shortly after your upcoming retirement, then pulling all of it out of the stock market might make some sense. However, if you need to spread this financial resource out over several years beyond retirement, a more balanced risk management approach might be in order.
Identify risks in a volatile market
One way to put your decision in perspective is to remember that, whether you invest aggressively or conservatively, your money will be subject to some form of risk.
Obviously, if your money is heavily in stocks, it is at risk of suffering a substantial loss. The risk of suffering a loss from which you can't recover is heightened if you have a short investment time frame.
However, if you pull your money out of stocks and move it into short-term vehicles like savings accounts or CDs, you may make it inevitable that the purchasing power of that money will be eroded over time by inflation. The longer your investment time frame, the greater the risk of inflation becomes.
Is your CD losing value to inflation? Try the CD calculator
Balance risk: Stay in your asset-allocation lane
Because investing involves a trade-off between different forms of risk, it makes sense to set an asset-allocation approach that involves some degree of balance between stocks and less risky investments. It's okay to tweak the balance between stocks and other investments occasionally, but swinging from one extreme to another is risky.
As an alternative, set a range of allowable asset allocations. For example, if you want to gravitate over time toward a 50/50 mix of stocks and less risky investments, you might shoot for keeping the mix somewhere between 40 percent and 60 percent in stocks.
This way, when you are feeling bearish, you can push your stock allocation down toward the 40-percent range. When you are more optimistic, you can push it up toward the 60-percent parameter. This will give you some room to adjust without taking your asset allocation too far away from your long-term target.
Need to learn more about asset allocation? Read Why you need to rebalance your investments -- today
Plan to ramp investment back up
However you decide to handle a move toward more conservative investments, if you are investing for the long term, you should have a plan for moving back into stocks at some point. You might use stock market valuations as a trigger for when to ramp your stock position back up again, or simply allocate future additions to your investment account to stocks so the increase in overall stock allocation happens gradually over time.
So yes, investing can feel like an out-of-control roller coaster at times, but just remember that wide swings in asset allocations can actually make the volatility of the market worse.
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