When I wake up in the morning, one of the first things I do after playing with my kids is check my iPhone to see whether the market is green or red. Sadly, it feels like the market has been mostly red this year, and it is getting kind of depressing.
So, how do you invest in uncertainty?
As a fee-only financial planner, I do not make money from managing my clients’ investments but helping them make sound investments that align with their goals is a key part of my job. A lot of the stress of watching the market’s ups and downs is alleviated because I know that my client’s investments match a specific time horizon for a defined goal.
Here are three simple steps to help you invest during uncertain times:
Step 1: Define your goal(s). Limit yourself to three. For example, you may want six month’s worth of expenses in an Emergency Fund, public college savings for two kids, and sufficient funds to retire by age 60. What is the specific dollar amount associated with each goal?
Step 2: Determine your time horizon. This will determine your investment vehicle. Anything you need to pay for in the next three years needs to be in cash or cash equivalents. If you are saving to buy a house in the next three years, your money needs to be in cash. However, don’t park this money in your regular savings account. Open a high yield FDIC insured savings account that is one step removed from your day-to-day accounts and is earning 0.8%+ interest. If you want a bit more yield, you can buy Pimco’s Enhanced Short-maturity Strategy Fund ETF (Ticker: MINT) that yields around 1.1%.
If your time horizon is 20+ years, you will need to invest in stocks and bonds, and real estate (if so inclined), to make sure your money can grow. Your portfolio needs to be diversified, and you need to ensure that you are saving sufficient funds each year to make your goal. Asset allocation will be determined by the time horizon and how much you need to make (rate of return) to reach your goal. Once you have done this, you can check your portfolio 1-2x per year to make any needed changes. Don’t look at the daily ups and downs. You will evaluate your portfolios based on your goals and required rates of return, not the market’s latest story.
Step 3: Learn to Invest. Learning to invest can be daunting, but the fundamentals are simple. Investing is NOT a get rich quick scheme. Investing is making your money work for you. There is a learning curve, but the lifelong rewards of learning to invest will outweigh the effort you need to put into it. Investopedia seems to have the best Investing 101 information. (Google “Investing 101” for the link).
Once you have a solid idea of your financial goal, time horizon and learn to invest according to these criteria, you can feel confident that your money is working the way it should for you. If you cannot seem to get started, work with a professional to jump start your process.
When my daughter was born, I figured out how much money we needed to make in order to cover expenses and pay for childcare. The trick was how to make this much money and still work part-time! Thanks to the guidance of my father (a former bond broker) I learned an amazing lesson on investing. I learned that my money could make money for me now (not just in retirement). Personally, I have an income generating portfolio that is now exceeding my income needs, and I can re-invest this money towards other goals such as college savings and retirement.
Katy Song, CFP, focuses on comprehensive financial planning for families with young children and couples starting their lives together. You can contact Katy at firstname.lastname@example.org , visit her website katysong.com, or follow her on twitter @katydavissong. She lives in Mill Valley with her husband, 5 year old daughter and 1 ½ year old son.