How quickly markets turn: In late April, stocks hit a four-year high, after posting their best first-quarter return in more than a decade; by last Friday, those gains disappeared as investors fled equities for "safe haven" investments like bonds and cash. Then today, stocks jumped up again -- more than 200 points -- on signs Europe may be gearing up for more economic stimulus.
What's an investor to do? Despite the old Wall Street adage, "sell in May and go away," many pros said they had high hopes for spring, especially given the year's strong start. They also expected Facebook's highly anticipated initial public offering to get regular investors excited about stocks again. But the social media giant's flop since going public on May 18 -- along with new concerns over Europe's debt troubles -- has only reinforced many people's fears about the stock market. Stock funds lost $3.1 billion so far this year through May 30, according to fund researcher Lipper. "People are skittish about any news that comes out," says Anne Ward, an adviser with Allodium Investment Consultants in Minneapolis. That includes snapping up shares on any sign that Europe is solving its debt crisis -- as happened today.
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Meanwhile, bonds present a different kind of danger. Investing pros say the ultra-low-yield environment is forcing many to balance their desire to limit risk with the very real danger of not keeping up with inflation. Indeed, the 10-year Treasury closed at a record low of 1.47% Friday nearly a percentage point behind the core inflation of 2.3%. As a result, financial advisers are urging investors to stick with stocks, including emerging-markets stocks, many of which are trading at discounts. For income-focused investors, they say dividend-paying stocks issued by blue chips make more sense than low-yielding Treasury bonds.
And with interest rates close to zero, many advisers are also recommending short-term quality bond funds as an alternative to holding cash or cash-like investments. Some are also turning to commodities and other alternative investments, such as real-estate investment trusts and gold, to help reduce volatility.
SmartMoney regularly checks in with financial advisers to see what recommendations they have for investor portfolios given current market conditions. Here's what they're saying.
The Portfolios:
- 32-year-old professional planning to return to grad school
- 50-year-old couple with two kids in college
- 57-year-old empty nesters
- 25-year-old carefree bachelor
- 40-year-old couple with a kid headed to college
- 70-year-old multimillionaire couple with lots of potential heirs
- 35-year-old couple with a young child
- 42-year-old couple; one spouse in unemployed
- 75-year-old widow
- 34-year-old recent newlyweds
- 55-year-old single parent, kids finished college
- 65-year-old marathon runner
- 45% Stocks
- 30% Bonds
- 5% Alternatives
- 20% Cash
Any cash needed to cover school costs need should be protected from market volatility, advisers say, so that you're not required to sell investments to cover tuition. Those savings can be set aside in a checking account or money-market fund, where it won't generate much interest, but will be protected from market losses, says Drew Kanaly, chairman of Kanaly Trust in Houston. Another option is to tuck savings for upcoming college expenses in short-term high-quality bond funds that will offer slightly higher yields. Soon-to-be grad students should still be putting money away for retirement, says Kanaly, by contributing enough to a 401(k) savings account to take advantage of an employer match. And with retirement decades away, stock portfolios should also include foreign stocks, pros say.
- 50% Stocks
- 30% Bonds
- 10% Alternatives
- 20% Cash
This couple will need more cash on hand and should be more conservative with their investments until the kids are out of college, says Anne Ward, an adviser with Allodium Investment Consultants in Minneapolis. With interest rates hitting new lows, you may be able to use a low-interest loan, such as a home-equity loan, to cover some of the college expenses, she says. Retirement, however, is still 15 years away and you both could live another 40 or more years so it's important to continue contributing to your IRA or 401(k). Use intermediate-term bonds, both taxable bonds and tax-free municipal bonds, instead of long-term bonds, which will see steeper price drops if interest rates rise, says Ward.
- 55% Stocks
- 28% Bonds
- 15% Alternative Assets
- 2% Cash
Now that the kids are out of the house, you can use your free cash to boost your retirement saving, says Anne Ward, an adviser with Allodium Investment Consultants in Minneapolis. The Internal Revenue Service allows people age 50 and over to make annual catch-up contributions of up to $5,500 a year to a 401(k), 403(b) or other qualified retirement plan. That's in addition to the $17,000 limit for annual contributions. Make headway on any remaining debt, such as a mortgage, to reduce your cash needs in retirement, she says. And consider buffering your portfolio from market volatility by investing in alternatives that are not directly correlated to stocks and bonds, including commodities like real estate and tactical funds that can short assets.
- 55% U.S. Stocks
- 30% Foreign Stocks
- 10% Bonds
- 5% Cash
At this age, advisers recommend being heavily invested in stocks. Because of your longer time horizon, you can also hold a good portion of stocks from emerging-market countries, and small- to mid-cap companies, which have greater growth potential, says Drew Kanaly, chairman of Kanaly Trust in Houston. Of course, those stocks will also come with greater volatility, he warns, so add some balance with U.S. blue-chips. Get a savings account started so that you don't have to drum up a big credit card bill when an emergency arises, he says. Setting cash aside now can also get you ready for a potential home purchase a few years down the line, says Kanaly.
- 50% U.S. Stocks
- 15% Foreign Stocks
- 20% Bonds
- 15% Cash
To prepare for college expenses, you should start moving any money meant for tuition into cash-like investments. "The last thing they want to see is that money they accumulated to take a 20% hit," says Joseph Montanaro, a financial planner with USAA Financial Services in San Antonio. Consider shifting money meant to cover the first two years' worth of expenses into a certificate of deposit or savings account, he says. Short-term bonds can be used for holding cash meant to cover costs for years three and four. The rest of your savings should go to your retirement savings, says Montanaro. Consider putting 60% in stocks and 25% in bonds, including a sliver of high-yield bonds, and the rest in cash, he says.
- 45% Stocks
- 40% Bonds
- 10% Alternatives
- 5% Cash
Because you want your assets to last beyond your lifetime, you have a longer time horizon than some other investors your age, advisers say. Consider using alternatives to shield your portfolio from market volatility, including managed futures, private equity and hedge fund products, says Jimmy Lee, president of Strategic Wealth Associates in Las Vegas.
On the bond side of your portfolio, many experts recommend short-term bonds that mature in three years or less. For someone in your tax bracket, tax-free municipal bonds or Treasury Inflation Protected Securities can lower your tax burden and help you keep pace with inflation, advisers say. To minimize the downside of your investments, you might look at tactical mutual funds that give portfolio managers the flexibility to invest across asset classes and move into sectors they believe have value, says Lee.
- 60% Stocks
- 10% Alternative assets
- 20% Bonds
- 10% Cash
Advisers recommend striking a balance between saving for college and saving for retirement. To avoid ignoring a cause, use different savings buckets for each goal, says Jimmy Lee, president of Strategic Wealth Associates in Las Vegas. Money being put away for a long-term goal, such as your child's college expenses or retirement savings, can be invested in stocks and intermediate-term bonds. Take advantage of market volatility by adding stocks to those accounts when the market is down, says Lee. Money being set aside for a future home purchase can be stashed in cash and bonds with a dash in equities, depending on your time horizon for making the purchase.
- 40% Stocks
- 10% Alternative assets
- 25% Bonds
- 25% Cash
Living in a one-income household makes it more important to have cash on hand to cover any potential emergencies, advisers say. Put those immediate cash reserves, say enough to cover six months' worth of expenses, in a money-market fund or a savings account to make sure it is easily accessible, says Jimmy Lee, president of Strategic Wealth Associates in Las Vegas. Any other long-term savings can go into CDs. But you'll need some growth, so don't bail from the stock market, says John Sestina, a certified financial planner in Columbus, Ohio.
- 15% Stocks
- 45% Guaranteed Investments
- 25% Bonds
- 15% Cash
At this age, your retirement income is being supplemented by Social Security benefits and pension payments, if you or your late husband earned one at work. In addition to those payments, you likely have a lump sum of money you want to invest in order to last you through the rest of retirement, which could mean an additional 20 years for those in good health, says Frank Armstrong, president of Miami-based advisory firm Investor Solutions. With interest rates as low as they are, retirees should avoid long-term bonds, which would see the steepest price drops if interest rates rise, advisers say. Secure about 10 years worth of income in short-term, high quality bond funds, says Armstrong.
- 50% U.S. Stocks
- 25% Foreign Stocks
- 15% Bonds
- 10% Cash
Any money not covering your daily living expenses should go into your retirement savings and to start a fund for a potential home purchase, advisers say. Money being set aside for a down payment should be kept in short-term bond funds so it can be accessible, says Drew Kanaly, chairman of Kanaly Trust in Houston. Since you are still 30 years away from retirement, you should be able to get aggressive with your retirement savings account, he says, by invest in a mixture of stocks, bonds and alternatives. In the last group, include master-limited partnerships, real-estate investment trusts and gold can help you hedge against inflation and tamp market volatility.
- 55% Stocks
- 30% Bonds
- 5% Alternatives
- 10% Cash
Now that you're through paying college expenses, you might have more cash available to add to your retirement savings, says Anne Ward, an adviser with Allodium Investment Consultants in Minneapolis. With retirement 10 years away and hopefully a long life ahead you still need a large stock portfolio to produce returns that can last you well into retirement. Shield your savings against market volatility by using tactical funds that can short the market.
- 55% Stocks
- 25% Bonds
- 10% Alternatives
- 10% Cash
Being that you are in good health, you may want to delay receiving Social Security benefits until age 70 to take advantage of delayed retirement credits, advisers say. Social Security benefits are increased by 8% each year a person waits beyond full retirement age, for a maximum 32% boost at age 70. You can also help prepare for a long retirement by maintaining a hefty stock allocation, says Anne Ward, an adviser with Allodium Investment Consultants in Minneapolis. Buy high-quality dividend stocks that should be less volatile than the overall stock market because they're issued by large, stable companies, she says. Same goes with the bonds in your bond portfolio.
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