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Where will You Stash Your Cash? by Beth Jones, RLP®

What’s on your mind as you try to navigate the current financial environment? The Roll Magazine editorial staff and I would like this column to be an interactive forum for our readers. Please forward all questions relating to your financial life to Beth Jones at bjones@thirdeyeassociates.com. I will respond in this column within the guidelines of FINRA regulation, which prohibits me from giving specific advice without understanding your entire personal financial situation. I will make every effort to address your questions and concerns by presenting what I see as possible solutions, but information provided here should not be construed as advice specific to you, or replace professional advice from a trusted advisor.

Where Will You Stash Your Cash?

The current panic among investors is unprecedented. The market volatility seems to be rattling even the most dedicated investor enough to think about cashing out of the market before there is “nothing left.” Rational thinking goes right out the window when we believe our survival is threatened. I perceive my job as representing the voice of reason to keep investors from making bad choices.

Are you feeling panicked? Do you have an urge to bail on the markets? I recommend asking yourself these questions: If you cash out, what will you do with your money? How will you know when it’s time to get back in? How long will your nest egg last? Dalbar, Inc. Quantitative Analysis of Investor Behavior—2008 Research indicates that investors who allowed their emotions to guide their investment decisions, averaged 4.4 percent vs. 11.8 percent* average return of the S&P 500 index. When you account for inflation, your real rate of return is less than one percent.

Let’s say you are planning your retirement, and have $800,000 in a diversified portfolio with 60 percent in stocks and 40 percent in bonds and cash. A moderate portfolio such as this has averaged over seven percent return annually over the past 10 years, including last year. But, you say it was down 25 percent last year, is down another eight percent year to date, and you’re thinking “I have to preserve what I have.” You’ve looked at your expenses and determined that actually, you need this portfolio to generate an income of $33,600 annually to supplement your Social Security. What are your options?

If you cashed out, where would you put that cash … in a money market fund or CD? Is your bank really safe? FDIC insures up to $250,000 per account holder per bank, so you would need to put your money in many different banks.

Treasury bills are backed by the U.S. Government, and would seem to be a safer alternative, depending on how you feel about our government. However, bank money markets and T-bills are paying about .05 percent right now, which generates only about $400 a year, or $33 a month, a far cry from $2,800 per month you need. Bank CDs are much better, but still only pay around two percent, or $16,000 annually, and none of these options provide protection against inflation.

What are some other options? There are currently some real bargains out there. AAA rated corporate bonds are yielding five percent or more, which in today’s deflationary environment would completely meet your income needs, producing $40,000 a year. High yield bonds would return even more, but have higher risks. The risk of bonds is that the company or municipality may fail, and inflation can reduce your buying power in the future.

Rather than buy just bonds, and to guard against inflation, you could add some real estate investment trusts (REITS). Many of those are yielding seven percent to 10 percent, and would produce up to double the yield needed. You could even add some dividend-paying stocks, which are yielding three percent to five percent. Actually, there are so many good options that the best choice might be to add some of each.

You might have enough to provide the income you need, with a little left over to rebuild your portfolio. Hold on! That may be exactly the type of portfolio you already own (if you are properly allocated and rebalance regularly) — the one you want to sell.

It’s easy to panic if you listen to the financial news on cable, but remember, these people are paid to make “news.” I recommend you focus on your present situation and the options you have today to generate income and recover what you’ve lost. Maybe you can work a little longer or spend a little less, and rebalance your current portfolio. Try looking at your portfolio as if it were cash. Then ask yourself, “If all I had today was cash, what would I do with it right now?” Allow your emotions to be there, but don’t let them run the day.—R

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Beth Jones, RLP® is a Registered Life Planner and independent Financial Consultant with Third Eye Associates, Ltd. located at 38 Spring Lake Road in Red Hook, NY. She can be reached at 845-752-2216 or www.thirdeyeassociates.com. Securities and Advisory Services offered through Commonwealth Financial Network, Member FINRA, SIPC, a Registered Investment Adviser.


* Represents average annually compounded returns of equity indices vs. equity mutual fund investors; based on the length of time shareholders actually remain invested in a fund and the historic performance of the funds appropriate index. Past performance is no guarantee of future results. Investors cannot invest directly in an index. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. Real estate investments are subject to a high degree of risk because of general economic or local market conditions; changes in supply or demand; competing properties in an area; changes in interest rates; and changes in tax, real estate, environmental, or zoning laws and regulations. REIT units/shares fluctuate in value and may be redeemed for more or less than the original amount invested.



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