Ben, CDs are certainly more rewarding than cash while being less risky than equities or bonds. Of course, the longer term the CD, the higher the anticipated return. I'd also suggest that after CDs, the next step up the risk ladder would be a very conservative mixture of stocks and bonds, perhaps 20% stocks and 80% bonds. Traditional thinking would say 100% bonds would be the next option, but I'd contend that the diversification from having a small portion of the portfolio invested away from bonds but in stocks lowers the risk factor.
Ben - The Fed's zero rate policy is pushing investors into riskier assets. The other possibility is a high quality short-term bond fund. Although, you need to realize that if interest rates rise, the value of your bond fund will decline. Vanguard has a very good short-term bond fund. It's current yield is 2.13% and it maintains a dollar-weighted average maturity of 1 to 3 years. It's average credit quality is rated A.
Hi Ben - if this is money that is set aside for emergency or if you need to spend it in the next year or two, I would keep it in cash rather than putting it at risk in the market. You can consider short-term CDs or online savings accounts that have a slightly higher interest rate.
Ben, Buying foreign stocks, ETFs, or international mutual funds can be a great way to diversify your portfolio. Many advisors recommend putting a range of 15% to 25% of your money in foreign stocks. I think 20% is a good place to start. It's meaningful enough to make a difference to your portfolio, but not too much to hurt you if foreign markets temporarily fall out of favor. Besides, you can always ratchet up your exposure as you become more comfortable with international markets. Before investing, you should take a risk tolerance test or two. There are some good tests available online.
Hello Ben -- The percentage of your portfolio to invest in international stocks depends on your risk tolerance, your portfolio size and your short-term and long-term goals.
Hi Ben - I agree with Kim's comments. International stocks will tend to be more risky than domestic stocks, but will add diversification to your portfolio. A rough guideline I use for the stock portion of the portfolio is 2/3 domestic, 1/3 international for someone who is more conservative and 1/2 domestic, 1/2 international for someone who is more aggressive.
We have another follow-up from Ben.
Hi Ben - if you need the cash in say 3-5 years, you can consider a balanced account of 40-50% stocks, 50-60% bonds. HOWEVER, keep in mind that you could potentially lose principal if there's a bad year in the stock/bond market in the next few years. So as long as you're willing to take the risk, you can invest it. Otherwise, stick with cash or short-term CDs.
Karla, that is possible -- it's quite busy in here. Give me a second to look for your original question, and I will re-post it. thanks for your patience!
I am going to re-post Karla's question from earlier now.
Hi Karla - Given your "long-term growth" objective, I would use a blend of mutual funds and ETFs with a more aggressive allocation. Perhaps 70% in stocks or even higher? Keep in mind though that when you turn 70 1/2 you will have to take required minimum distributions from your retirement funds, which could reduce the amount that would be left for charity. However, you can always take some of the distribution and donate it to the charity at that time.
Karla - I love your charitable bent! Given the timeframe and goal, it might argue being more aggressive. That said, it is YOUR risk tolerance, and if you are risk averse then losses might cause you more discomfort than you wish. I would recommend a balanced portfolio that matches your risk profile.
Thank you, Karla. Glad we could help! And thanks for your patience!
Hi Ken, we appreciate your feedback and understand that there are things we could do to improve the format. When we post transcripts at the end of the day, I will re-order the questions and answers so that they fall together. Unfortunately, with the volume of questions, there is no way to do that during the chat. Thanks for your understanding and patience!
Alright advisors, let's go ahead and take this next question from Nicholas
Alright, let's go ahead and move on to our next question from Anne
Anne - As long as he has earned income under $178,000, you as a spouse can contribute the maximum to the Roth IRA, even though you are past 70. %5,500 + $1000 catch up.
Anne, to extrapolate on Mark's comment, as long as your household income is under the limits, both you and your husband have the ability to contribute up to $6,500 into your Roth accounts this year.
Married couples with a MAGI greater than $173,000 and less than $183,000 for tax year 2012 and greater than $178,000 and less than $188,000 for tax year 2013 may still be eligible to contribute to a Roth IRA, but will have reduced contribution limits.
Hi K2 - I think your question is a bit difficult to answer without knowing more about your financial situation (age, income, taxable accounts). Based on what you've shared here, it sounds like the bulk of your assets are in real estate. I'm not sure if adding more to real estate would be a good idea, especially if you're close to retirement. Balancing your portfolio out with more liquid investments might be appropriate, it will also give you more diversification.
Here is a question from Nicholas
Nicholas - Great question. First, you can only put $5,500 +$1,000 catch up into a Roth each year. However, you currently have the ability to make contributions for 2012 and 2013 - but the 2012 contribution has to be made by April 15th. I'd contend the answer to your question depends on your current income, and what you anticipate for your future income. The advantage of a Roth IRA is it allows you to pay taxes now and enjoy tax free growth. This would be particularly advantageous if you feel you will be in a higher tax bracket in the future. On the other hand, if you believe you will be in a lower tax bracket in the future, it may make sense to contribute to a SEP or Solo 401k to defer paying taxes at today's high rate and allow us to pay taxes at the lower rate in the future.
Hi Nicholas, it's great idea to get started on saving for your retirement. However, if the $20,000 in cash that you have is your only savings, then I would not invest it just yet. I'd recommend that you keep 6 months of your fixed expenses in cash as an emergency fund. Then I would set up a SEP IRA or solo 401k and start putting money away depending on how much you make each year. You can do some research on the advantages of a SEP vs a 401k to see what is better for your needs.
Great point about the emergency reserve Theresa.
Nicholas - I would agree with Theresa. Start with the emergency fund. Your age and current vs. future tax bracket makes a difference on the Roth vs. pre-tax issue. The younger you are and the lower your bracket, the better the Roth becomes.
Thanks, all. That should give Nic a great start
Here's our next question from Janice