Ask Money

Where to invest money

Chris Farrell Sep 9, 2010

Question: I am a government employee. Unfortunately, I came in at the time when Civil service benefits were not offered, so the majority of my retirement is in some form of 401. I foolishly sold/transferred my portfolio in March of last year, when the market was at its lowest and lost lots of funds. I put it into the G fund. This past October in order to recoup some of the loss, I placed most of it in the emerging markets funds. A co-worker is telling me that I should transfer it into the S and C fund because of the problem caused by the Greek crisis. Any suggestions? I am also tempted to put it into an aggressive L fund (2040) even though I hope to retire in 10 years. This is frustrating. I try to read, but don’t feel very savvy. Thanks. Linda, Detroit, MI

Answer: It’s frusrating. But slow down. This is too much activity.

For those who aren’t government employees, the Federal Retirement Thrift Plan is among the best in the country. It offers a number of very low-cost broad-based investment options. That’s what all those letters in the question stand for.

For instance, G fund assets are invested in U.S Treasuries. The C fund is managed by the money manager BlackRock and it’s invested in a stock index fund that mimics the Standard and Poor’s 500 (S&P 500) Index, a broad market index made up of the stocks of 500 large to medium-sized U.S. companies. The L funds are target date fund that invests in a well diversified portfolio made up of the various funds in the Thrift Plan. The asset allocation is established by your target date for retirement. The portfolio gets more conservative as you age. And so on.

Your experience is why many professional money managers and finance economists believe trying to time the market is hazardous to your wealth. You have to not only know when to get out of the market but also when to get back in. That’s really hard to do well over time even for the pros..

I would add that taking on extra risk in order to make up for a poor portfolio performance is a recipe for even bigger losses. And a 10 year time frame for retirement time isn’t very long. You’ll want a more conservative portfolio.

The basic money question to ask isn’t “How much money will I make on my investments?” but “How much can I afford to lose?” You then pursue an investment strategy that allows for growth while minimizing the downside. You don’t want to be 70 years old with a portfolio that has lost half its value.

A terrific book on investing is Burton Malkiel’s A Random Walk Guide to Investing. It’s short and simple and full of investment wisdom. You might get some ideas of how to invest your money from it. Malkiel will also explain why you should be wary of following Mr. Market’s manic moods

What sort of portfolio should you have? A lot goes into that answer, but a good starting place–a default position–is to lean toward picking one of the conservatively managed target date funds (rather than one of the more aggressive options, whether a riskier target date fund or going all-in on a stock fund). The portfolio is well diversified and it gets more conservative as retirement nears. It’s also a way of avoiding the urge to jump from one investment strategy to another.

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