What to do about the stock market
Lots of generalities that work in the long run
The news is very strange these days, and people have been asking me if they should sell all their stocks.
First of all, if I knew the answer for sure, I would be living on my beachfront estate in Maui, and I would not be sharing the secret with anyone else.
Second, I don’t know all the ins and outs of the finances of the people who ask me what they should do. I don’t want to give anyone terrible advice!
What I’m doing is the same basic stuff that most people should do most of the time: rebalancing and keeping money for large, looming expenditures in cash.
We keep 30% in bonds and 70% in stocks. Bonds return less than stocks, on average, but they also give you a cushion against stock market volatility. If you’re young, a few down years are easier to take than if you are closer to retirement, so it’s okay for most younger people to have all their money in stocks. As you get older, you probably want less risk.
To rebalance, you sell the asset that you have more of and use it to buy the asset that you have less of. So, for example, if you have a $100,000 account and you want it to be $70,000 in stock and $30,000 in bonds, but you actually have $85,000 in stock and $15,000 in bonds, sell $15,000 of the stock and put it into a bond fund.
Rebalancing forces you to buy low and sell high, and that’s the name of the game over the long haul. Last year was a good year for the stock market, so my guess is that many people have portfolios that are a bit out of alignment. If you don’t have a target allocation, you probably should get one.
The next thing I did was convert one particular account to cash so that the money is safe when I need it, probably in a few months. It’s my State University Retirement System (SURS) account from my years of teaching at University of Illinois at Chicago. I never really dealt with it, even though I haven’t taught at UIC since 2017, because there was occasional talk of my going back for a semester or two. But my husband turns 65 this year, and so I decided that it was time to figure out what to do. I thought I would take out a chunk of cash to cover health insurance for a year, then put the rest into a rollover IRA.
But then, I had a conversation with the SURS representative and got a nice surprise: if I took the money in the account as an annuity, with a regular payment every month for the rest of my life, I could participate in the SURS health insurance plan. The premium on that is lower than anything I could get through the Obamacare exchange, which makes annuitizing much more valuable than it would be otherwise. The monthly payment on an annuity is based in part on the value of the account the day that the annuity starts. Instead of leaving the money in the market and risking the account value falling between now and this summer, I moved all the funds to cash. It will sit there until a) I am ready to turn it into an annuity or b) our plans change and I put it back into 70% equity, 30% bonds.
All of which is to say that you should make sure your portfolio is where you want it to be and that any large cash expenditures in the coming year are in cash now. Also, even if you think you know what you are doing, it’s often useful to have a conversation with someone who knows just a little bit more, like the helpful SURS representative.
What percentage of your money should be in stocks? Well, it depends! Here are some articles that might help you figure out what works for you:
Is Warren Buffett’s 90/10 Asset Allocation Sound? (Investopedia)
Should You Have Bonds in Your Investment Portfolio? (Motley Fool)
Why You Should Be Taking a Hard Look at Your Investments (NYTimes gift link)
Is 60/40 dead? An asset allocation method hits hard times (Britannica Money)
What are you thinking? Share in the comments!