While on Twitter the other day, I ran across someone who was lamenting that she had bought a few stocks “awhile ago,” and that some were doing well, some very poorly… “Wondering when to get out.”
My first thought was: Hmmm. What was your plan for this money? And why do want/need to get out? Simply because some are up and some are down and it’s making you uneasy? In that case, you might want to re-think your risk tolerance. Or is it because you actually need the money?
What this all boils down to is whether or not you have a plan for your money – and whether or not you’re comfortable with that plan. The stock market is not a place to put money on a whim, and you certainly shouldn’t be putting money there if there’s a decent chance you’ll need it in the next 5-10 years.
Why? Because it might go down. A lot. And you might wind up being forced to sell at the bottom. Fortunately, it’s relatively easy to avoid this fate.
For starters, you need to have a healthy emergency fund, which will provide a cash cushion in the event of unforeseen financial difficulties. If not, you could be forced to liquidate your investments at the worst possible time.
Next, you’ll need a clear idea of your goals. If you’re saving for something like a house downpayment or a car, and you foresee needing the money in the next few years, then you should stick to guaranteed investments like CDs or even a savings account. Sure, the interest rate won’t be very high, but your money won’t shrink, either.
If, on the other hand, you’re saving for the long-term (e.g., college for your young kids, retirement, etc.) then you might consider investing in stocks and bonds. In this case, it’s important to think hard and do some research before acting.
- How much in stocks vs. bonds?
- Do you want international exposure?
- Individual equities or mutual funds?
- Actively managed or index funds?
And so forth. I can’t tell you what’s best for you, but I can tell you what we do…
We’re currently holding a 60/40 split between stocks and bonds. This roughly reflects the old “age in bonds” rule, and puts us at a comfortable (to us) spot on the risk/return continuum.
Within the stock category, it’s 2/3 domestic and 1/3 international. Within the bond category, it’s 2/3 total (domestic) bond market and 1/3 TIPS. For all of these holdings, we’re primarily using index mutual funds, which provide broad diversification and rock-bottom costs.
The bulk of our holding include:
- Vanguard Total Stock Market Index Fund (link)
- Vanguard Total International Stock Index Fund (link)
- Vanguard Total Bond Market Index Fund (link)
- Vanguard Inflation Protected Securities (link)
From here, we never have to ask questions like “When should I get out?” We simply make new contributions in proportion to these targets and rebalance when things get out of whack. As we approach our goals, we’ll gradually adjust our stock holdings down and bump our bonds up.
What about you? Do you have a plan?