Stocks' dive triggers useful rethinking on goals

Staying Ahead

September 21, 1998|By Jane Bryant Quinn | Jane Bryant Quinn,Washington Post Writers Group

PERSONALLY, I could do without stock market dives. But when they come, they often trigger useful second thoughts. How much of your life have you put at risk? Maybe you're too far out on a limb.

Most investors understand the two surest rules for earning long-term capital gains. Buy well-diversified stock-owning mutual funds (or stocks in first-class companies) and hold on. Don't try to move money in and out of the market, when you think stocks are going to rise or fall, because you'll so often get it wrong.

But how much of your money should be in stocks and how much somewhere else? That's a question to which there is no easy answer.

Stockbrokers, mutual funds and personal-finance magazines all publish guidelines for "conservative," "moderate" and "aggressive" investors. They're called asset allocations.

When you allocate, you divide your financial investments among stocks, bonds and money-market funds (money funds are equivalent to cash). The guidelines tell you what percentage of your money to allocate to each.

But the guidelines may not reflect your actual life situation. As an investor, you may be temperamentally aggressive. But if you have huge debts or a shaky job, a conservative allocation would be a better choice.

A good financial planner can help you make an appropriate decision, as long as you're open with the planner about the rest of your finances.

You can also make a reasonable decision yourself, if you understand the rules. Among the questions to ask yourself about money invested for the long term:

Were you anxious every minute when the stock market started to fall? You're probably too heavily invested there. You still need to keep a good portion of your retirement money in stocks. But a higher percentage should be in bonds -- for peace of mind as well as an anchor to the wind.

If you make this decision, keep it. Don't sell some of your stocks today (at a loss), then buy them back when the market is back up. Change your stock allocation permanently.

Is much of your retirement money in the stock of the company you work for? The past month probably gave you a glimpse of what could happen to your retirement if your company's stock should fall.

If your plan allows it, move a substantial portion of your money out of company stock and into diversified mutual funds.

If the company contributes the stock and requires that you keep it, be more conservative with the rest of your retirement account. Ratchet up the portion you keep in bonds or stable-value funds. Go for conservative stock funds, rather than aggressive ones.

Are you self-employed? There's no employer to pay you a pension or contribute to a 401(k) on your behalf. All you have is what you'll build yourself.

You need a larger allocation to safer money -- that is, quality bonds or bond funds. Think of them as your equivalent of the guaranteed pension that many employees get. Safe money also protects you against the extra risk you take by being self-employed.

As an employee, you might feel good having 80 percent of your money in stocks and only 20 percent in a fixed-income account. When self-employed, however, you might want 50 percent in fixed-income investments.

Funds invested in high-quality bonds rise and fall in value, just as stock funds do. But they don't change in price as much.

Do you have large debts -- say, a major mortgage or business debt? Your money should be invested more conservatively, in case something happens to your income.

You might think you ought to invest aggressively, to help pay off your debts. But that's rolling dice. What if you're heavily invested in stocks and the market collapses just when you lose your job? You might be unable to carry your debts and also pay your living expenses. You need cash and safe-ish bonds, as a just-in-case.

Are you young and working for a good company? You won't tap your retirement plan for 30 years or more, which means that you can afford to be heavily into stocks. But minimize the amount of company stock you own. It won't necessarily do as well as the market, long term.

Are you retired? If you'll be using your savings to live on, they should be managed conservatively. But any money you know that you will leave to the next generation can be committed more energetically to stocks.

Pub Date: 9/21/98

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