Managing short term investments when the market is scary

Tina Haapala |

Written by Gary Silverman, CFP®

The last two weeks we looked at why I’m not pulling money from the market even though I think we’re heading toward a recession. In the previous column, I stated that one of the reasons I can do this is that I don’t generally have money in stocks that a client (or myself) will likely need in the next few years. This way, if we hit a recession-triggered bear market I have time to ride out the problems.

This week I want to elaborate a bit on that and discuss one of the most critical techniques when investing in at-risk assets. By “at-risk” I’m talking about investments that can go down and stay down long enough to mess up your spending plans. While I’ve covered this before, it makes sense to remind veteran readers again and to fill in this gap for those joining us only recently.

For me, gambling is something I reserve for a casino, not an investment portfolio. That’s why if I have a need for money in the next year or so, I’ll keep that in cash or something equivalent. Back when interest rates were a lot higher than they are now, I typically used a money market mutual fund. Some of you might still use them for your cash needs. Well, interest rates are low…very low, and in this environment often a bank or credit union will pay you more money. That’s what I use and what I can recommend for you.

When it comes to money you won’t need for 5 or more years, then your normal balanced portfolio (equity and income mix) will be just fine, no matter how scary it might get sometimes. It’s the money you need more than a year from now but in less than 5 years that gets a little tricky.

If you are very risk tolerant you can use your balanced portfolio for spending needs four years out. Even three is okay…you’ll just get caught in some losses occasionally. My research shows it’s not a bad tradeoff, but know that you are going to have to cash out at a loss now and then—do this with your eyes open, no fair complaining later.

For many of you though, any part of your portfolio you’ll need to live on in the next five years should be kept in income-oriented investments. CDs, short-term investment-grade bonds, and fixed annuities are commonly used. Yes, they don’t give you much return these days, but you are using them because they’re better than a savings account and they don’t lose money.

Having the next several years of spending money nice and safe should do two things for you. First, it will let you go to sleep at night when the world looks dire and your portfolio sour. Second, it will help you in keeping the long-term part of your portfolio (the part with stocks mixed into it) invested rather than be tempted to cash out when something like a 2008 occurs.

This article was published in the Wichita Falls Times Record News on February 21, 2016.