Q: I have $436,900 in cash in my TD Ameritrade retirement account. It has been in cash since my former company disbanded and the retirement account was rolled over five years ago. Because I have been afraid of not having investment skills, it has remained in cash. I am 59 years old. My occupation for the last 18 months is housewife. Can you give me a way out of this fear?
A: Being in cash for five years means you’ve paid a very high price for fear and indecision. But you know that.
If you had been invested in a simple, traditional balanced fund that was a 60/40 mixture of stocks and bonds — such as the Vanguard Balanced Index fund that I mention regularly — your investment would have nearly doubled over the last five years. The recent five-year annualized return was 13.23 percent.
Will you do as well over the next five years? Maybe. Maybe not. The only thing we know for certain is that cash earns nothing, the purchasing power of our money is declining about 2 percent a year, and many economists believe that more inflation, not less, would be better.
You may be able to escape (or at least reduce) your fear by remembering that it is unlikely that you would ever need all of your money in the same day or week. So while some portion of your money can be held in cash and be immune to major market losses, another portion of it can be held in stocks because the only time its value is important is in the future. And the longer you own a broad portfolio of stocks, the greater the odds that it will provide a positive, inflation-beating return.
Among money managers a portfolio that is 40 percent stocks is considered quite conservative. So suppose you go conservative and then some — suppose you put one-third of your money in cash, one-third in short-term inflation-protected securities and one-third in stocks. Two-thirds of your money would be quite safe and one-third would be subject to major market ups and downs.
Could you tolerate that? If you can, you have a way out of your fear. If not, make it still more conservative. There has to be some level, however low, where you are willing to put some money at risk in the pursuit of a return that is higher than inflation.
Q: I am 80 years old. My only income at this time is my Social Security ($1,200 per month) and some money from a $60,000 401(k) account and a $15,000 IRA account. I must withdraw from each every year. I also have a small amount of dividend income from an investment with Merrill Lynch. I have kept most of my taxable money in CDs, most of which are coming due in the next two years. I currently have $200,000 cash to invest and need some advice. In one of your articles you mentioned Fidelity Puritan as being a good fund. I am planning to see a Fidelity adviser and would like some suggestions to invest my money to get income without too many fees. I’d also be interested in any other funds from Vanguard or Fidelity that would generate income.
A: Fidelity may offer a broad platform for investing, but you shouldn’t expect them to suggest the very lowest-cost investments. A reasonable self-steering path would be to invest in Fidelity Puritan fund shares. It is a managed balanced fund, rated 4 stars by Morningstar, with low expenses — 0.59 percent a year — and it has beaten at least 75 percent of its competition over the last 3-, 5-, 10- and 15-year trailing time periods. Its current yield is about 1.5 percent. This fund currently has more than 60 percent of its portfolio in equities, which makes it relatively aggressive.
At your age, most advisers would suggest that you have a second investment to provide a “buffer” against losses. Your certificates of deposit provided safety in the past, but you might consider a short-term inflation-protected securities exchange-traded fund. Fidelity offers 65 exchange-traded funds (ETFs) commission-free, so you could buy shares of the iShares Barclays 0-5 Year TIPS Bond Fund (ticker: STIP).
Your income will still be less than you need, but at 80 you can start to consider spending some of your principal.
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