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Tuesday, October 07, 2008

Terry Savage on CNN

Appearing on CNN this AM, Terry Savage (Terry Savage Fan Club) was asked some investment questions.

Rhonda wanted to know if she should leave her 401K alone or move her money and/or her percentage contributions to more stable bonds.

Terry said if Ronda is still working and has 20 or more years to retirement, then she needs to keep contributing. Terry said 30% in company stock is a little too much so she should look to diversify. She also said bonds are risky if somewhere down the road inflation returns. Her allocation advice was to "stay balanced" with "more in stocks."

I agree 100% with those good answers.

Kirk's Asset Allocation Advice: I like the rule-of-thumb "120 less your age in equities." The equities should be a globally diversified basket of index funds such as the "core portfolios" I recommend in "Kirk Lindstrom's Investment Newsletter." For example, if you are 40 years old and don't plan to retire for 20 or more years (unless you get lucky with some of my "explore portfolio" stock picks) then you would have 80% in equities and 20% in fixed income. If you are well into critical mass, then put even less into equities and get inflation protection from TIPS since you don't need the extra "expected" return from equities at the much higher volatility (risk.)

Liz asked "I have an annuity with AIG.... is it safe? Should I take action?"

Terry said the government put $85 billion behind AIG to prevent it from failing so she says you should not lose sleep over it but you should understand what you own and the risks associated with the investments in your annuity. You can get that information from your agent.

Jane, a 19 year old college student, said she put a couple thousand dollars into the market last week. She wants to know if she should continue to do this if she doesn't need it for three years.

Terry said three years may be too short a time period for money you need to be invested in stocks. A repeat of the 1970s could see the markets lower in three years even after the huge recent decline. Terry recommended a money market fund for money you know you will need in three years or less.

Kirk Comment: This note came in an email from Terry Savage this AM.
Few of today's investors remember the seventies. At the start of that decade, in 1972-74, the Dow fell from over 1,000 to below 600 in 18 months. Then the DJIA stayed below 800 until this bull market started in summer of 1982.

In Japan in the 90's their stock market dropped similarly, and took a decade to rebound -- because their government refused to confront the problems in its financial system.

The markets NEVER repeat exactly, but it's wise to learn from history. And history tells us that -- unlike recent experiences of quick declines and major rebounds -- it IS possible that the market could go down, and STAY down for a significant period of time.

It's not about the markets -- it's about YOUR financial situation! It's about your age, risk tolerance,and ability to withstand a market decline, both in financial and emotional terms. It's time to think about your investments in a larger perspective, not just what the market will do in the next few hours.
That's the Savage Truth!
Kirk Comment: I remember the 1970s well. I entered UC Berkeley's college of engineering in 1975 about the same time my grandfather retired. He bought a lot of dividend paying stocks to fund his retirement. Sure the market went nowhere during that time but he and my grandmother lived well off those dividends including many trips all over the World. I've learned from this. My "explore portfolio" has a mixture of hopefully undiscovered explosive growth stocks and safer stocks paying good dividends. This diversification between growth and value gives me opportunities to rebalance for added return. (See Using Asset Allocation to make money in a Flat Market for how this works.) I buy both when out of favor with the idea both will continue to give me long term results that crush the market averages.

Joe in Georgia asked if the DOW went up 777 points after going down 777 points does it mean he is back to even.

Terry said this is true only if you own the DOW index. Other indexes with greater diversity may do better or worse. Terry added there has never been a 20 year period where stocks have not made money in a diversified portfolio of large company stocks so Joe should keep investing for the long-term.

If you want to know what I have been buying in this period of weakness with my profit taking dollars from selling when the market was higher, Subscribe to Kirk's Investment Newsletter TODAY and get the October 2008 Issue for FREE!

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