I’m pleased to welcome back The Bizzy Life’s resident financial expert, Ray Link, with some sage financial advice about what to do with your money right now. Of course, this assumes you have some money right now. Unfortunately for many people, their retirement funds have now collapsed to a point that the best approach towards investing their nest egg might only involve a 6 pack and a pole dance. But if you aren’t in complete financial ruin, read on…..
And before I forget, my special congratulations to Ray Link for recently being named Oregon “CFO Of The Year”. Unfortunately I missed the award ceremony, which included what I heard was some pretty facinating in-depth discussions on the new GAP rules, and a special performance by the LIBOR ballroom dancers (nobody parties like accountants!). But seriously, Ray well deserves the honor, and I wish he had been at the financial helm of many of our big banks and car companies the last few years. We might all have money to invest!
What to Do Now.
by Ray Link
About a year now I wrote an article entitled “Why Investing in Stocks Might be a Bad Idea” where I tracked the returns of stocks compared to a simple and safe money market fund for 10 years. The results so surprised me I felt compelled to write my article. What I did not contemplate was the historic melt-down of most all markets to come about just a few months later wreaking havoc on most American’s savings and retirement dreams. Many people have lost so much I hear stories of people not looking at their monthly statements, or worse selling out of stocks completely and “tossing in the towel” and placing all their assets in low interest money-market funds. So the question is what to do now?
I actually like corrections and dislocations as it gives us an opportunity to buy things cheap and to sort out winners from losers. The vast wasteland brought on by the market collapse also created great opportunities. However those great bargains were in October last year so now we have to be realists in our return expectations. One of the keys to successful investing is to not panic and over-react to a situation.
My suggestions are based on investing retirement assets as these are tax-deferred and assumes you have a long term view and are willing to take some investment risk. Assets in taxable accounts require different strategies.
For starters I like the notion espoused by the late Sir John Templeton, founder of the Templeton group of funds, that your portfolio should have an equity (stocks) exposure of no greater than 100 minus your age. So if you are 55 like me, no more than 45% of your portfolio should be in stocks or equity mutual funds. I like stocks of companies with strong balance sheets, lots of cash and market leading positions and technology stocks with strong intellectual property (patents). Some examples include Cisco, Exxon, IBM, Research in Motion (makers of Blackberry devices), Costco, GlaxoSmithKline-Kline, Zimmer Holdings (makers of joint replacements), Abbott Labs, Home Depot and General Electric. Any portfolio should include at least 10 – 15 stocks with no more than 5% of your total portfolio in any one stock. I also like to use some of the ETFs such as the QQQs which track the Nasdaq, the SPYs which track the S&P 500 or similar securities to add some diversification without the high fees of mutual funds.
Next I like to keep the non-equity portion of my portfolio in relatively straight forward instruments such as 3-5 year certificates of deposits, government bonds and very high quality corporate bonds. An interesting way to “play the market” yet retain the safety of an FDIC insured CD is through “equity-linked” CDs. These are available through Schwab and other brokers and usually give you some percentage of the return of an index such as the S&P 500 over a period of 3-5 years, but if the index is negative, you get 100% of your money back. Imagine how your portfolio would look today if you had these as opposed to equity mutual funds? Another equity-linked play using bonds is through bonds that are convertible into stocks. These are difficult to buy and have some additional risks so I suggest using a fund such as the Vanguard Convertible Bond Fund (ticker symbol VCVSX) which is 5 star-rated by Morningstar.
So how might a $100,000 IRA portfolio look for a 55 year old planning to not need any of this money for at least 5 years?
$30,000 in 10 different high quality stocks
$15,000 in at least 3 different ETFs such as QQQ, SPY and DIA
$25,000 in CDs ranging from 3-5 years with a yield of around 3%
$10,000 – $15,000 in several equity-linked CDs
$5,000 in a convertible bond fund
$10,000 in a combination of government and corporate bonds with a maturity of no greater than 5 years.
Before you do any investing it is always best to seek the advice of an investment professional as well as you accountant, do your homework and ask a lot of questions and regularly review your portfolio. Please note that some of the stocks and funds listed above are investments that I currently own and that I am not a registered investment advisor.
Happy investing – it’s time to get serious again and re-work that portfolio!
Ray Link is a CPA and holds an MBA from Wharton. He is EVP/CFO of FEI Company (NASDAQ: FEIC), a world leader in tools for nanotechnology. He is on the Portland State University Business Advisory Council and on the Board of Directors and Audit Committee for Cascade Microtech (NASDAQ: CSCD).