Is Your Money Where It Should Be?

Posted By Paul

If I can find any silver lining in the current crazy economic times it is the fact that it has provided me with a reminder that I need to be careful about where my money is.

Here are some examples I've been hearing about where people learned lessons by the current fall in the market:

1) I have friends who were hoping to retire soon, but their nest egg was in very aggressive funds. When the stock market dropped, their nest egg shrunk, so now they need to postpone retirement until they can afford it.

2) I have other friends who have a 529 college savings plan for their child. Their child will be off to college soon so they were surprised when their college savings shrunk dramatically right when they were hoping to use it.

3) As I have mentioned in earlier posts, I keep part of my "rainy day fund" in what I view as pretty conservative stocks. Though conservative, these equities are still part of the stock market and they have not been immune to the recent drops.

It's one thing to fill out questionnaires about 'risk tolerance' and quite another to actually watch your investment shrink day after day.

So here are some things that I've been looking at as I do a risk tolerance gut-check for my investments.

1) For retirement funds, I'm where I should be. Sure it's hard to watch the balance of my retirement accounts fall, but I am going to try to keep in mind that it's not like I have plans to access that money any time soon. I need to think long term. One way to make sure that your investments match your retirement timeline is to use a target date retirement fund. Another choice is to periodically view and re-evaluate where your money is relative to your retirement timeline.

2) As a new father I've been looking into 529 savings plans. I noticed that the 529 plan that I'm looking into has a target date fund as well. You give it the expected years until college and it transitions the contents of the funds to less aggressive investments as the years go by. I plan on trying this as a way to make sure that my risk tapers off as we get closer to the time where we'll need the money.

3) There was a great comment on a previous post: Economic Chaos: So Now What? The comment was that it wasn't a very good idea to count securities as part of my rainy day fund. I can't argue with the sense that the whole point of a rainy day fund is to have money available at a moment's notice when you need it, which means that you should have it in a very low risk investment. So I'm going to stop viewing my stocks as part of my rainy day fund, and instead I'm going to work on increasing my rainy day fund by adding to my savings account and CD's. I'm going to keep my stocks because they are still doing fine for me, I'm just not going to count them as part of my rainy day fund.

So hopefully no one out there has been burned too badly by the stock market drop, but if nothing else this drop has been a great object lesson on making sure that your investments REALLY match your risk tolerance.