Seasoned financial observer Terry Savage has some suggestions for investors in what may be a more volatile year in the stock market.
TERRY SAVAGE: I am Terry Savage, author of the Savage Truth on Money and a frequent contributor to Money Show.com. Now I know you come here for investment advice and you get it here from the pros. Enough advice to maybe make your mind spin. Well that is what it is all about, sorting out the bulls, the bears and let me add a third category, the bulls, the bears and the chickens. Let me remind you that everybody should have a little bit of chicken money that is nothing to be ashamed of; it is money you simply cannot afford to lose. Now, whatever the proportions are depends on your intelligence, your knowledge of the markets, your stage in life and the size of your assets. Always keep in mind that having a safe bit of money set aside can help you ride through the inevitable volatility, the ups and downs and even big market declines that could take you off your investment path. If you know you have some money set aside in chicken money investments, you are far more likely to stick to your original plan and that original plan could include contributing $200, $500 or more every month to an index fund, let’s say, in your 401(k) plan. Remember, there has never been a 20-year period where you would have lost money in a diversified portfolio of large company stocks with dividends reinvested even adjusted for inflation. Those are the Ibbotson facts. Over the long run, you should come out ahead in a diversified stock market portfolio reinvesting your dividends.
But what about that chicken money? How much should you have and where should it be? Well, as I said, by definition chicken money is money you cannot afford to lose. That means it goes in things like insured deposit accounts short-term a year or less, or insured money market deposit accounts, or treasury bills. I understand your problem with that. You are earning absolutely no interest, but on the other hand, you will not have any risk of loss. Well, you might be losing a little bit to inflation because the Feds are really stepping on savers to keep rates low, but there is some price to be paid for peace of mind and having some chicken money on the side, an appropriate amount, lets you sleep at night with your more aggressive and diversified investment plan. I am Terry Savage and that is the Savage truth.