Right now, everything looks good for the stock market. But I know what you're thinking: How long will the good times last?
The market's nine-month rally has continued almost unabated since March. Every time there's been a brief pullback, stocks have gone on to rise even further. And although some readers have used the respite that the rally provided to assess their risk tolerance and make moves to get their portfolios back in shape, I'll bet that plenty of you would like to ride the bull as far as it would take you before reining in your investment risk.
But after those big gains, many investors feel stuck between a rock and a hard place. They know they need to take risks in order to reach their financial goals, but the volatility of stocks has them wondering if they have the discipline to stick with their investing plans.
Fighting money panic
That's an especially big concern for the investors that Foolish retirement expert Robert Brokamp helps through the Fool's Rule Your Retirement newsletter. When you have short-term goals that you need money to cover now -- whether it be a down payment for a home, putting kids through college, or getting ready to retire -- you can't afford to take the same risks that you do for longer-term goals.
But when you look at all your investments in a single portfolio, even normal market fluctuations can make you nervous. For instance, if you have $10,000 in cash set aside for some immediate need, and you have a net worth of $200,000, all it takes is a 5% swing in your portfolio to lose that entire $10,000. And even though the loss doesn't make the cash actually disappear, it can definitely make you feel anxious about parting with that money.
Don't kick the bucket
Robert advises an easy way to help you beat these anxieties and spend what you need to, while keeping your investment strategy intact. By separating your money into discrete "buckets" for different purposes, you can stay confident that you'll be able to meet your immediate needs while staying on track for long-term goals like retirement.
Here's a simple example of how such an approach might work in real life. Say you need to send your child to college in three years and will need $100,000 spread over four years. You also plan to retire 15 years from now. If you have $300,000 in your investment portfolio, here's how the bucket strategy might work:
- The college bucket would largely be invested in short-term savings vehicles like CDs and money market accounts. But with six to seven years before you'll need to pay tuition for your child's senior year, you can afford to have some conservative stocks in that bucket as well -- stocks like Johnson & Johnson
(NYSE:JNJ)or Pepsico (NYSE:PEP), for instance, that combine reasonable value with the backing of dividends.
- In contrast, your retirement bucket would include your more aggressive investments -- companies in recently volatile sectors, like Mosaic
(NYSE:MOS)and Wells Fargo (NYSE:WFC), perhaps, along with small growth stocks such as Blackboard (NASDAQ:BBBB).
By creating two buckets, you can use the appropriate strategies to meet each goal you have. That way, even if you make a bad bet on a particular investment -- for instance, the airline industry, which plummeted yesterday as Delta Air Lines
You can always count on markets being volatile. But while you can't control the market, you can control how market moves affect you. If the prospect of further losses has you worrying about your financial future, try out the bucket approach -- it should help you stay on course.
Learn more about the bucket approach, along with other useful advice, from our Rule Your Retirement newsletter. You can read all of Robert's helpful advice, along with investment recommendations and much more. Click here now to take advantage of our free 30-day trial offer.
This article was originally published on June 23, 2009. It has been updated by Dan Caplinger, who doesn't own shares of the companies mentioned. Johnson & Johnson and PepsiCo are Motley Fool Income Investor picks. Blackboard is a Motley Fool Hidden Gems selection. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy keeps your stomach acid-free.