On March 4, I instructed the custodian of my son's 529 college savings account to liquidate all stock investments and convert the balance to FDIC insured Certificates of Deposit (CDs). When I made that decision, the account's balance was in the neighborhood of $126,000. Those instructions were executed the following Monday, March 6. That was a relatively flat day for the market, but it happened to be just before the Silicon Valley Bank collapse began roiling the stock market.
My timing could not have been better. By making the move when I did, I protected the account from seeing more than a $5,700 decline in just a few days. Importantly, it's also immune from any further market fallout that may follow as investors digest the loss of that critically important part of the high-tech venture capital-backed part of the economy. That timing raises a key question: How exactly did I know to liquidate that $126,000 just before the troubles started?
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The not-so-secret reason for that success
The reality is that I had no idea that this past week would be that rough on the market. Like many others, I didn't see the Silicon Valley Bank collapse coming, nor did I anticipate the fallout that it would have on so many other stocks. What I did know was two key things:
- Stocks can go down as well as up, and indeed, from time to time, the market does crash.
- Because of that, money you know you need to spend soon does not belong in stocks.
The reason I picked that day to liquidate the account was simple: That was the day my son made his choice of college. Based on his scholarships and the school's cost of attendance, our expected out-of-pocket costs for four years projected out to almost exactly $126,000.
The account's balance was (barely) sufficient to cover those costs. With his selection complete and the bills expected to start soon, there was no longer a need to take stock market risks. With a market decline always a possibility, I simply decided that there was no time like the present to lock in the funds to meet those expected costs.
In other words, I liquidated the account's stocks because their purpose had been served and the underlying financial goal they had been invested for had been reached. The timing of that choice was purely coincidental. Said more simply: What I did was strategic, but when I did it was pure luck.
The combined power of goals and asset allocation
Most of us have reasons for the money we're socking away for the future. Sometimes, it's for aspirational targets like retirement, a new home, a new car, college expenses, or the vacation of a lifetime. Other times, it's for more pedestrian needs like an emergency fund in case of a surprise major healthcare bill or unexpected unemployment. Whatever the reason, you can turn it into a goal by adding a decent estimate for how much you will need and when you will need it.
Once you know your goals, you can design how you save and invest for them. Key questions to consider when building your plans include:
- How much flexibility is there in both when you'll need the money and how much you'll need?
- Where does this particular goal fit on your priority list when compared to your other goals?
- How close are you, both in time and in account balance, to reaching your goals?
With those questions in mind, you can start to build an asset allocation strategy that will both let you reach for your goals and let you actually enjoy them if you hit the target you need. As a general rule, you can segment your money into four time-based buckets:
- Money you need right now or might need at any time for emergencies.
- Money you know you'll need in the next five or so years.
- Money you know you'll need at some point in the longer-term future.
- Money you don't expect you'll ever strictly need within your lifetime.
For the immediate or emergency money, cash in the form of an FDIC insured checking or savings account is a wonderful option. Sure, you'll likely lose money to inflation over time, but that's nothing compared to what you'll lose if the market falls just before you need to withdraw money to cover a bill.
For money you know you'll need within the next five or so years, duration-matched CDs or investment-grade bonds can be reasonable tools to use. Those types of investments generally offer higher returns than cash, while still offering higher certainty of cash flows than stocks or other high-risk assets. When it comes to "duration matched," you should take that that term to mean "the investment matures and converts into cash just before you need to spend the money."
For money you know you'll need in the longer-term future, stocks can be an appropriate place to invest it. Still, you have to recognize the volatility -- and the higher risk of outright failure -- that can happen when you invest in stocks. This is a key reason stocks are only appropriate for money with a longer-term focus. Because while they can be a great tool for building wealth over time, they can also be a terrible tool for preserving cash you need right now.
That leaves money you don't expect you'll strictly need within your lifetime. If you're consistent and successful with your investments, you might find yourself trending ahead of one or more of your goals. That gives you tremendous flexibility.
You can use the extra money to either shore up some of your other investments that are behind their goals or otherwise de-risk part of your portfolio. You can invest that money extra-aggressively in the hopes of hitting it big -- without risking your key goals if it fails. Or you can start building a financial legacy that can last even after you're gone. Whatever your choice, it's yours to make, and the opportunity is more likely to open itself up over time if you consistently invest toward your goals.
Start today to get your plan in place faster
I may have gotten lucky with the timing of when I liquidated that $126,000 of stocks, but I was able to take advantage of that luck because years before, I had put a solid plan in place. The sooner you begin mapping out your goals with a reasonable asset allocation strategy, the better your chances of finding yourself in a similar position for yourself in the future. So get started now, and get yourself in a better spot to truly take advantage of the lucky situations the market may send your way.
