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Evaluating Your Options
Dear Jeff:
My husband and I are retired and living comfortably (not lavishly) on pensions and Social Security. We had a nest egg of about 133K, which has decreased to about 120K in recent weeks. It's all 403b money, invested in Fidelity mutual stock funds, mostly growth and income, one international fund, and a money market fund.
I'm tending to sit tight and hope for an upturn but wonder if I should drop the international fund and put some money into bond funds. The problem is that I really don't know anything about bond funds. First, how do they work? Second, what would you advise--stay put, reorganize, or back out? Also, I have a couple of thousand dollars in the bank which I plan to give to my grandson in a few years for college. Where should I put it to get the best return with the most safety at this time? Thank you very much! Pat Jeff Says:
Don't back out of your investments simply because of a recent downturn in the market. The key is to maintain the appropriate asset allocation unless your objections or financial circumstances have actually changed. For more information on asset allocation, visit the ThirdAge Money forums.
I would probably not recommend moving your international account to bonds, either. If your overall portfolio is causing you to lose sleep, however, you could consider moving a portion of the international fund to domestic equities. On the other hand, you probably should consider moving at least a portion of your money market fund into a bond fund to improve the overall performance of the income side of your portfolio.
Bonds are simply debts of corporations, which they repay at a stated interest rate. Thus, the primary objective of bond funds is to produce income, which is usually paid monthly and can be reinvested directly back into your fund. Your principal is not guaranteed. It will fluctuate with the change in interest rates. However, common sense will tell you that the better the financial condition of the corporation issuing the bond, the safer your investment because the risk that the corporation will default on the loan is reduced.
Your last question pertains to investing for your grandson. If he will need the money in less than five years, I would keep it in a money market account or certificates of deposit. If the time horizon for his education is longer than this, you should probably invest in growth mutual funds.
Finally, don't let the market fluctuations dictate your delay in investing this money for him. You won't make money if you don't invest and no one can accurately predict when the market will head up again.
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