January 2016 was a horrible month. The market lost over 5% of its value. December 2015 wasn’t all that great and now February is off to a bad start. This brings up the subject of how much of your money should be in the stock market and how much should be buried in Mason Jars down in the Wooley Swamp.
Always ask yourself the question, “When do I need this money?”
Maybe it would be better to start with the question, “Do I need this money?” That is the question to ask before applying for a loan. Do you really need that money so badly that you are willing to sell yourself into slavery to get it, or is there a better way? Sometimes debt is necessary, as in the case of medical expenses. Sometimes debt may be the best option, as in a first mortgage. Usually, even if there is a legitimate need for that money, such as education, there might be a better way. Grants, scholarships, work study programs, ROTC, or even a job for a time are all better options than a mountain of student debt.
When it comes to cars, clothes, cell phones, and the like—are you really ready to sell your soul to the man for the latest fashion statement?
There is money that you really might need in the short term future. That money is called the emergency fund. Dave Ramsey says 3 to 6 times your monthly budget in an insured savings account or money market fund. Most authors recommend six months take home salary or total monthly expenses in the emergency fund. After the last recession, Suzy Orman bumped that number to eight months. Take your pick, but if you have less than three months in your emergency fund, you need more money. Retirees who are spending more than they are receiving from pensions, Social Security, and annuities need to keep about one year’s worth of money in an insured readily available form. Anything that can come with a check book might be worth your consideration. Many of Vanguard’s funds come with a check writing option.
Depending on a lot of different variables, in time you will begin to consider money with a three to six year time horizon. What major expenses are likely to be out there waiting for you? If you have a seven year old car, it is pretty much a certainty it will need to be replaced before six more years have passed. Will you have cash in your hand when you show up at the dealership? If not you have some work to do. How about that fifteen year old central air conditioner unit that is making raspy noises? Do you have five grand in your back pocket? This kind of money could be held in insured brokerage CDs or Treasury notes that pay better interest than the banks can offer but can be bought or sold on the open market without penalty.
Of course you will have started your retirement savings program long before the time comes when you have money that you don’t need—today. Now we are talking about money that is right for investment. Your age and your tolerance for risk will define the nature of your portfolio. Your comfort level is important. If you can’t sleep at night, rebalance until you find peace. Full faith and credit Treasury Notes, Ginnie Maes, and the like are the safest option. Then investment grade commercial paper or intermediate term tax free municipal bond funds will give you a little better return with higher risk. I love dividend paying stocks with a track record. They are not perfectly safe, nothing is, but if you don’t need the money and you utilize DRIP reinvestment, you will be able to keep buying more shares when the price goes down and fewer shares when the price goes up. The same logic applies to low cost stock index funds. You need to consider all of these instruments as well as precious metals and even real estate. Move slowly. Be careful. If you don’t have too much money in any one asset and you don’t put too much money in the market at any one time, it is likely that you will be OK.
Finally, it is OK to go wild and crazy with a little bit of that money you don’t need. Here I am talking about foreign currency, gold mining stock, selling covered calls, or buying puts. A little jalapeño adds zest to the salsa, but only a little. On some of these plays you have a potentially limitless up side, but make certain your potential losses are well defined and understood.
Oh, I almost forgot about the Mason jar. Yes, it is wise to keep a little cash around the house. A hurricane may close the banks for a week. The man with the tow truck might demand cash or maybe you might just want to take your wife out to dinner without adding to the credit card balance.
No comments:
Post a Comment