Thursday, May 07, 2009

How's that Money Market Fund Working for You?

It's not often that this happens, but it looks like I made a really good call... on March 3rd, just 3 or 4 days before the S&P reached its most recent low, I published a post urging folks not to give up on the stock market. Boy, was that a good call or what?! In the same post I wrote about one of my colleagues who was so stressed about the market collapse that he decided to put all his new 401K contributions into a stable value fund. So here's what happened: not only did his 401K get decimated in the stock market collapse, his decision to "play it safe" caused him to miss out on the dramatic rally of the past couple of months. Talk about a double whammy...

As I said in my previous post, if you are so stressed about the market that you can't sleep at night, it doesn't matter whether you win or lose, you need to get out of the market. Peace of mind and sanity are more important than money. More than anything this is an indication that your asset allocation does not match your risk tolerance. Remember that next time you feel like jumping into the market. However, if you are not down in the dumps when the market heads south and don't dance with euphoria when the stock market goes on a bull run, your asset allocation probably matches your risk tolerance. Good for you. Your rewards will come in time (possibly in a LOT of time). 

As long as we are on the subject of the stock market, let me risk another call. I think that the stock market rally is for real. Although we may see a  correction in the near term (10% to 15%), I don't think we will be seeing anything like the lows we saw in early March. I think that the economy is on the mend, or more accurately, I think that the worst case economic scenario that people were bracing for is no longer very likely. Things are going to get better over the next year. I just hope we don't get hit with a dollar devaluation and / or a nasty case of inflation in the next 3 to 4 years.

More about investing and the economy from other bloggers:

Dividend's Value gives advice on how to select dividend paying stocks. I don't subscribe to this notion, but you might.

Some advice from Spiffy Links on how to detect investment fraud.

Back to basics, Invest Wisdom explains the concept of a P/E ratio.

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Rob Bennett said...

The game isn't over yet, Shadox.

I think that stocks offer a strong long-term value proposition when purchased at today's prices. By "long-term," I mean "ten years out." But I also think that there may be some truly frightening stuff happening in the next five years. So the question as to whether it is better to be in a money market is whether you can hold through some really bad stuff.

I think it depends on how hard a hit you took in the price crash. If you were going with a modest stock allocation pre-crash, you might be in good emotional shape. If you were going with a high stock allocation pre-crash, probably not. Lots of people were going with high stock allocations pre-crash and are not in emotional shape to be going with high stock allocations today.


Shadox said...

I basically agree with you. My point in this post was that by having an incorrect asset allocation (i.e. one that my colleague wasn't truly comfortable with in a down market scenario), he hurt himself twice: once by getting crushed in the collapse and a second time by bailing out just when the market was taking a dramatic turn for the better.

Obviously the game is not over yet (is it ever?) but that doesn't hurt the validity of my argument.

I also agree with you that emotional stability / comfort with your investment decisions are paramount. At the end of the day, money is not going to help you if you drive yourself crazy worrying about losing it...

Rob Bennett said...

he hurt himself twice: once by getting crushed in the collapse and a second time by bailing out just when the market was taking a dramatic turn for the better.Yes! I see this as a critically important point that is often overlooked in discussions of asset allocation. You pay not one penalty for getting it wrong, but two.


Funny about Money said...

Staying in the market made sense if you were young enough to see your assets recover before you're forced to retire. If you were in my position, however--laid off your job at an age when you haven't a snowball's chance to get rehired--you were screwed if you didn't rescue as much as you could from a tumbling market.

I set aside $23,000 in a money market fund to pay off a small second mortgage on my house. Not knowing whether I would have enough to eat as my future crashed in flames, I decided not to pay the loan but to leave the cash in that fund to double as an emergency fund, figuring that in a worst-case scenario it would take some time for the lender to have me evicted from my otherwise paid-off home.

It now appears that I may be able to survive by cobbling together several minor sources of income, even though the combined total of my savings has dropped to where it was 20 years ago. I'm mighty glad I put the cash in that money fund--the $170/month I'll regain from cash flow by paying off that loan with the money that didn't go down the toilet will make the difference between whether I can survive on Social Security plus two other pittances or whether I default on a loan and end up living in a trailer.

It will be another two decades before my savings might (not "will") return to an amount that could reasonably be expected to support me through retirement. By then, with any luck, I'll be dead.

If I had it to do over again, I would plan retirement by largely leaving investment returns out of the picture. That is, I would see to it that I lived in the cheapest possible paid-off housing in a reasonably safe area, put plenty of money in cash and bonds, and absolutely not follow the conventional advice that 60% or more of savings be invested in the stock market. I would invest some amount, just as I might go to Vegas now and then and shoot craps, but I would not count on it to support me in old age. If I were in my 20s now, I would strongly consider working in (and possibly emigrating to) a country that has a social system designed to provide its citizens healthcare and other basics of a decent life.

Shadox said...

Funny -

I am sorry to hear about your situation. Please don't take my post as an assault on your investment choices. Clearly, advice needs to be customized for the individual receiving it and is highly dependent on unique circumstances. At the end of the day, I always say that peace of mind is much more important than money or investment returns.

I do have to say though, that based on your description of the situation, it sounds like you may have been too heavily invested in stocks, both for your age and for your degree of comfort with the risk you were taking.

I sincerely hope that things work out for you. It always pains me to hear about folks who have worked hard and saved hard all their lives only to find themselves in dire financial straights whether because of mistakes, because of bad luck or for any other reasons. I am impressed by your attitude of trying to find a solution rather than pointing fingers or becoming despondent.

Thank you for taking the time to comment on Money and Such.