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Money: Where to Put It Now
Your investment decisions depend on whether you’re building your nest egg or protecting it. Here’s what some pros are doing.
The recession has put lots of people into a financial tailspin and left many investors feeling unsure about what to do. The knee-jerk reaction is to sell, but financial planners say it’s too late to move to the sidelines. “We all wish we had gone liquid last summer,” says Alexandra Armstrong, chair of the financial adviser Armstrong Fleming & Moore.
Diversification is crucial to surviving a recession, financial experts say. “In an era where many companies are going under, you want to avoid having all your eggs in a few baskets,” says Susan Freed, president of Freed Advisors in Chevy Chase. “Concentration can literally kill you.”
A sampling of industry veterans reveals that financial pros are optimistic about the future and are hanging onto many of their battered holdings. Some are hunting bargains. “I’m putting every penny I can back into the stock market,” says Paul Cocozza, a 43-year-old financial planner in Arlington. If you can buy only one fund, he recommends a broadly diversified stock-market index fund.
Certified financial planner Stephen Bingham of Arlington has rebalanced his portfolio, made up mostly of mutual funds. He owns an energy fund and a bank fund. In the fixed-income sector, he says, municipal securities are a good place to put your money.
Mary Malgoire, president of the Family Firm in Bethesda, fills her portfolio with no-load exchange-traded funds (ETFs) and hasn’t made any changes since the downturn began. She tells her clients to stay with low-cost indexes. “It’s not about hitting a home run,” Malgoire says. “It’s about consistent singles and doubles.” She calls bonds the “least good deal” right now: “Everybody has been running into bonds for a safe haven, and they’ve driven the prices up.”
Not all financial planners think alike. Armstrong has more bonds in her portfolio than ever before. Freed has trimmed equities and moved more money into bonds and cash. She thinks Treasury Inflation Protected Securities (TIPS), a form of treasury bond that provides protection against inflation, will do well in the long term.
The experts do agree on one piece of advice: Don’t pull out of the market completely. “If you throw in the towel, you actually realize the loss,” says Bingham. “You’ve got a paper loss until you sell or cash in.”
Beyond having patience and looking at your portfolio, how can you protect your financial health? Susan Freed says investors have to do their research: “It’s incumbent on every investor to be financially literate, understand their investments, and have a personal financial plan. Their life savings depend on it.”
An emergency fund with three months of living expenses used to be considered an adequate cushion, but financial planners now suggest at least six months of cash reserves. Half should be immediately available—in a high-interest savings account or money-market fund—and the other half should be kept in certificates of deposit.
Recessions remind people to live within their means. “We Americans have been overspending,” says Malgoire, who tells clients to look closely at their expenses. She says the first step is to get rid of monthly drains on your paycheck such as credit-card debt and high-interest car loans. Homeowners should explore refinancing their mortgages at a lower rate.
Then prioritize the extras—maybe scale down a vacation, bargain shop, or eat in more often. “Don’t think of all of your expenses as give-ins,” says Malgoire.
After such a volatile year, investors should also rebalance their retirement funds and make sure their allocations still align with their age and retirement goals.
Most important, planners say, is to continue to fully fund a 401(k). Says Cocozza: “Focus on the long term.”