David McPherson Answers Your Money Questions

Terry from Parker, Colo., asked: "Is it really best to stay in the stock market when it appears the economy will take many months to recover? Each day we hear that getting out of the market is the wrong thing to do. Like many others, our retirement fund has recently lost nearly a third of its value. We are already retired and are fearful that we will continue to lose more money if we stay in the market. Is it advisable to sell our stocks and keep the funds in a money market account until the economy improves and we can get back into the stock market? Thanks for your help."

McPherson answered: Terry, the answer to your question depends upon on when you expect to need these funds. Any portion of your retirement fund that you expect to need within the next three to five years should not be invested in stocks. Rather, it should be stashed in a money market account, bank CD or some similar conservative holding. If you're willing to accept a little more risk, a short-term bond fund may also be appropriate for a small portion of these funds.

If there's a portion of your overall portfolio that you want to grow and don't expect to need for at least five years, then a modest allocation to stocks is appropriate.

What I would do is rather than view your portfolio as a single entity, look at it as an array of portfolios designed to meet short-, medium- and long-term needs. Then invest accordingly.

I would also advise against trying to guess the right time to get in or out of the market. That's a losing game.

Diane from West Deptford, N.J., asked: "I retired last year at the age of 55 with 38 years of service with a large corporation. My husband is also retired. I rolled over my 401K upon retirement. Currently 68 percent is held in equities, 30 percent in bonds and 2 percent cash is reinvested. I don't planning on using this money for at least five years. I am, like everyone else, losing money. Should I look at redistributing my money; moving more over to the bond side or let it remain the same?"

McPherson answered: Diane, a 68 percent allocation to stocks might be a tad aggressive for some investors in their mid 50s, but if you have a reliable pension from your former employer, then it sounds about right to me. Investors with a guaranteed income stream from something like a company pension can afford to take more risk than those who rely entirely on their nest eggs to cover expenses.

As I suggested to Terry above, I would take a look at when you think you will need the funds rolled over from your former 401(k). You mentioned withdrawals would begin in five years. The portion you might withdraw in the early years should be invested more conservatively. It does sound to me like you need a little more cash in that portfolio. Two percent is a little light by my standards. I would take that up to about 10 percent, maybe drawing a little bit from both the bond and stock sides.

Overall, I think you're in the ballpark, but you need to consider your own income needs and your appetite for risk.

Doris from Uxbridge, Mass., asked: "I am planning on retiring within the next year and a half -- would I be better off withdrawing my investment money and paying the penalty?"

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