What can we do now?
Here is one possible suggestion. Of course, please consult your financial planner if you have one.
Create a Safety Net
- Make sure you have at least a 6 month emergency cash reserve. You can find an FDIC insured high interest online savings account at SavingsAccount.com and find reputable companies such as HSBC.
- Make sure you have enough health insurance and other types of insurance that you may need.
401k and Retirement Accounts
- Continue putting money in your 401k or Retirement Accounts, especially if your company matches your contribution.
- If you have many years/decades before you need your retirement money, then putting money in your 401k when the stock market is low is good, because that means you will be buying more shares with your money.
- Do not trade in your 401k or IRA retirement account.
- If you do not want to spend too much time managing your 401k, and if your plan offers a Target Date Mutual fund, which automatically adjusts risk based on when you plan to retire, research this fund. You can also check Morningstar and see if your Target Date Mutual Fund is a four or five star morningstar rated fund.
- You should adjust your equity and bond portion of your portfolio based on your age and when you plan to retire. The closer you are to retirement, the less should be put in stock equity, and more in bonds.
- If you do not want to use a Target Date Mutual Fund, you can allocate the different funds yourself. If you wish to have a 70% stocks, 30% bonds allocation, you could do:
- 30% Bond Fund
- 25% Large Cap US index
- 10% Mid Cap US Index
- 10% Small Cap US Index
- 25% International US Index
- 30% Bond Fund
- You can rebalance your portfolio once a year. Some 401k plans offer this as an option.
- Do not put in too much money in your company stock in your 401k. That is too much risk. Put no more than 10% of your 401k in your own company stock.
Before Investing in a Discretionary Taxable Portfolio
- Establish the Safety Net First
- If you have high interest credit card debt, consider paying it off aggressively. If the online savings account returns 3% and you have credit card debt at 10%, then paying off your credit card at 10% is a risk-free return of 10%. If your credit card debt interest rate (and you are carrying a balance) is greater than the return you get in an online savings account, consider paying off the credit card first. If the return you get on an online savings account (let's say 3%) is greater than your credit card debt rate (example: 1.5%), you can pay off your credit card more conservatively, and keep the extra money in the FDIC insured online savings account.
- Look around for high rate CD specials. Banks want to borrow money from consumers in this environment.
- With the Fed Funds rate at extremely low levels, watch out for any low interest rate specials, especially those credit card life of balance offers. Beware of the transaction fees, and make sure that the interest rate does not increase after some time. Late fees could invalidate the special credit card offer. Also, make sure there is no balance on that credit card where you use the credit card special offer, because your payments will pay off the lower interest rate first before the high interest rate. This is bad for you, and good for the credit card company.
- If you have multiple incomes in your household, it is best if the income producing individuals not work at the same company. What would be bad is if a company starts to downsize, and both members of the household are part of the same company. This is not good.
- Decide how you are going to use the money in your discretionary taxable portfolio. If you need the money within five years, it might be best not to put the money in stocks/stock mutual funds.
- If you do not own residential property (home, townhouse, condominium), consider preparing yourself for a purchase within the next five years. This down payment money should not be in the stock market (if you plan to use it within five years).
- Check your credit score and make sure there are no mistakes in your credit report.
- If you have done all of the above and need discretionary money six years or later from now, then you can consider starting a discretionary stock (and bonds) portfolio.
- Do your research, research on the internet, buy or borrow some (up to date and reputable) financial books.
- If investing for your child's education, do your research and consider some of the 529 plans around.
Managing your Discretionary Portfolio
- Determine your asset allocation model. Do you want to have 80% stocks and 20% bonds?
- If you do not want to spend too much time managing your portfolio, consider a portfolio of index mutual funds, or Exchange Traded Funds (ETFs).
- If you have an interest and the time to invest in individual stocks, make sure you do your research.
- You can do a combination of the above using the Index Mutual Fund method and then buy a few individual stocks, for the Core-And-Explore method.
- Diversify your Portfolio.
- Does your Portfolio have too much risk?
- How many stocks should you own in the Portfolio?
- For individual stocks (or very specific focused ETFs), make sure you know how to cut your losses.
- If you want to put money in regular intervals, consider buying mutual funds, and automatically investing in more shares of the fund.
- Continue Research including these financial websites.
- Consider using the same plan you are using in your 401k and Retirement Accounts. Your Target Dates may differ: 401k/Retirement when you retire, your Discretionary Portfolio when you plan to withdraw all the money.