9:52 AM Thu, Jun 24, 2010
Gary Silverman / Guest Blogger
Re: IRA-401K
I currently have approx 50% of subject in ancfx and remaining in ahitx totaling about 88K from which I am drawing $300.00/ mo. per govt regulations as I am 73 years old. I was wondering if there is anything that I should consider doing to better protect my principal at this time. I have been as described above since about Jan '09 and seen my account travel from a low of 60k to 93K (APR '10) and now back to its present value. Please advise.
Thank you,
Dave C.
Dave:
I make it a habit not to give advice on investments here, because I usually do not have enough facts to give a specific recommendation. However, we can discuss the general sort of investments that you have. The two funds you own in your IRA are a global stock fund (though with most of its money currently in the U.S.) and a high yield bond fund.
"High yield" or income bond funds are a gentler way of saying that you've got half your money in junk bonds. As the name implies, these are bonds that give a higher income level than most because they lend to less secure companies than a normal bond fund. When the economy takes a hit, people are more worried about getting their money back from a junk bond, and so the funds tend to drop in value along with their stock fund peers.
In other words, both of your funds can be rather volatile in the kind of zigzag market we seem to be in these days. To "protect principal" you have to take your money out of both funds and put it into a cash equivalent investment such as CDs or a money market fund. However, I think you may be looking to just dampen down the volatility a bit in the portfolio. In that case I've got a couple of ideas.
First, you could look at your cash flow from the account for the next five years. That's around $18,000 (but will change a bit each year as your IRA value changes). You could sell that amount of your account, put the money into a money market fund and draw your $300 per month from there. Each year (or more often, if your other two funds are doing well) you refill the cash fund back to $18,000. If they've been doing poorly, then sit tight. Using this method, you could protect yourself from a dip that lasts as long as five years, which is usually plenty of time for one of your funds to be in the black again.
The other method is to just reduce the volatility of the portfolio by repositioning assets. Again, some might be in cash equivalents, some into investment grade bonds, others in inflation-protection bonds, etc. You'll need to come up with an asset allocation model (the mix of investment types) that's best for your cash flow and risk tolerance. An investment advisor could help you with this.
I hope this helps a bit, but there's one other observation I'd like to make. Both of your funds are in the American Funds family, which are typically sold by a commissioned broker. If this is your situation, where's that person? Likely you paid a load (commission) on the funds when you bought them to compensate the sales person for spending time with you. Implicit with that is future counseling on what to do with your investments.
So, for Dave and the other readers of this blog: Hold your broker accountable for helping you. Make them earn their money. Of course, after the deed is done you may have decided that their advice wasn't really worth much (or they may have decided you weren't worth enough). In that case, go seek another opinion. A place to start is the FPA Planner Search.
Gary Silverman, MBA,CFP®
Financial Planning Association volunteer recommendations are for informational and educational purposes only. Please consult with your financial planner, CPA, or attorney before taking action based on this information. The Financial Planning Association or the volunteers will not be held responsible for any action taken or mistakes posted.
From dallasnews.com published on 9:52 AM Thu, Jun 24, 2010