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Plan Well, Retire Well

Saving and investing your money

Stock market turbulence is a reminder to check your asset allocation, risk tolerance


Perhaps you were blissfully unaware of yesterday's wild ride on the stock market. But if you were following the news, how did you react? Were you panicked, thinking that you wished you didn't have so much of your portfolio in stocks? Perhaps you intended to rebalance your portfolio after the market gains over the last several months – selling some of your stock investments and boosting bonds or cash to get back to your target asset allocation – but didn't get around to doing it. And now you regret that you procrastinated.

Experiences like this are another wake-up call to make sure that your investments match your goals, and your time horizon, as well as your emotional ability to handle risk and your financial capacity for risk. Here are some thoughts to consider:

Monitor Your Asset Allocation

Set up an easy way to monitor your asset allocation, so that you'll know when you need to rebalance. (See my earlier post for an explanation of rebalancing.) If you work with an investment adviser, ask if they can generate an alert when your allocation is out of balance by more than, say, 5%. You can also track your own asset allocation if you enter all of your investments into software such as Quicken, websites such as Mint.com or Morningstar.com's Instant X-Ray, or tools offered by your financial institutions. Or, download my Asset Allocation Analyzer in either Word or Excel format. Some retirement plans even offer automatic rebalancing for that portion of your portfolio. One downside: Many of those tools won't generate an automatic alert to rebalance, so you have to remember to check it yourself.

Take Advantage of Market Fluctuations

Let dollar-cost-averaging work for you. Don't stop your payroll contributions to your 401(k) or other retirement plan when the market gets crazy. Say you're putting money into Mutual Fund EFG. By contributing the same amount each payday, you force yourself to buy more shares when the price of EFG is down, and fewer when the price goes up. Buying more when it's cheap is smart investing.

Prepare for Retirement

If you are five years or less from retirement, calculate how much money you'll need each year in retirement to cover expenses. Subtract income you'll receive from pensions, Social Security, or annuities. The remainder needs to come from your investments, including employer retirement plans and IRAs. To avoid having to sell those investments when markets are down, you may want to shift enough money to cover one year's expenses into a CD maturing in your first year of retirement. Next year, you can sell enough to cover another year's worth of expenses, and put that in a CD maturing in your 2nd year of retirement. Continue each year, building a ladder of CDs to cover up three to five year's worth of expenses. If the market tanks one year, you can skip selling investments that year and live off the reserve you've built. When the market recovers, sell extra to rebuild your cushion.

The stock market might not have another day like May 6, 2010 for years to come. But if you faithfully rebalance and keep money for short-term goals out of the stock market, you'll be prepared when (not if) it happens again.

Click on my name below to tell me how you apply these ideas to your own personal finances.



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