Ask Money

Moving soon and savings

Chris Farrell Oct 17, 2008

Question; My husband and I are both in our early 30s and now that we are both finished with graduate school we are finally in a position for the first time in our lives to have money to invest. The money that we had saved prior to grad school had gone to purchasing our condo. We are both putting some money away for retirement through our jobs and we don’t have any debt except for our mortgage and what is left on our student loans. I was planning on contacting a finical adviser however now that so many investments are loosing money (including the ones that our retirement funds are in) I am considering putting our money in some short term CDs and investing it in 6 months or so. Is this a bad idea? We were hoping to use at least some of the money to by a house in a little over a year when my husband finishes his post doc and we have to move. I have read through some of your other advise and have seen that you mention money market mutual funds often. Would this still be a good idea right now? Elizabeth, Bozeman MT

Answer: My advice for you would be the same in good times (remember those days?) and bad times (like now): Stash your short-term savings in a very safe place. The price for safety will be a low yield, but that’s okay. The savings will be there when you need it.

After all, the savings will be tapped in a relatively short period of time, perhaps a year or so from now. You’ll be moving and that’s always expensive. You may buy a house and you’ll probably want to sell you current condo. A certificate of deposit (CD) at a federally insured bank or credit union is a safe parking place for savings. If you do decide to go the money market mutual fund route, remember my two maxims for safety. First, go with a blue chip, nationally and internationally known financial institution and, second, stick with the U.S. Treasury security-only option (or the money fund that is primarily comprised of short-term Treasury securities.)

What’s more, I’d put the money in a money market mutual fund that has decided to participate in the U.S. Treasury’s new stabilization program. The money market fund has to sign up. To be sure, the government fund only backstops money invested in a participating money market fund before September 19th. Still, it does offer reassurance to those investors and is a source of stability to the overall fund.

For your longer term investments, including retirement, I would build up a well-diversified portfolio. I agree with an Op-Ed piece Burton Malkiel wrote in yesterday’s Wall Street Journal. He’s a finance professor at Princeton University and author of one of the best selling investment guides of all time, “A Random Walk Down Wall Street:”

But just because stock markets have panicked, investors should not. The best position for investors today is not “fetal and 100% in cash.” We are not going to have a depression, and we have survived financial crises before. A century of investing experience, as well as insights from the field of behavioral finance, suggest that investors who bail out of equities during times like these are almost always making the wrong decision.

It is very tempting to try to time the market. We all have 20/20 hindsight. It is clear that selling stocks a year ago would have been an excellent strategy. But neither individuals nor investment professionals can consistently time the market. The herd instinct is extraordinarily powerful. When the economy and the stock market were booming in early 2000, investors could easily convince themselves that prosperity would continue without interruption and that stocks catering to the “New Economy” were surefire tickets to wealth….. The herd instinct works exactly the same way in bear markets. Nervous investors convince themselves that every “light at the end of the tunnel” is a train coming in the opposite direction. Panic is just as infectious as blind optimism.

Before you hire a financial advisor, I’d get a copy of Burton Malkiel’s “The Random Walk Guide To Investing: Ten Rules for Financial Success”. It’s in paperback (so it’s a lot cheaper than hiring a financial advisor) and the short book contains the kind of information most of us need to do well investing over a lifetime.

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