Q&A: Riding the market waves

Dear Liz: Today’s stock market is one of the most volatile of all time. So many issues affect it, and there seems to be no end in sight to war in Ukraine, inflation, high fuel prices, the pandemic, China conflict concerns and more. Any one of these would cause the market pain, but together it’s scary. I have a broker who’s used to riding ups and downs, and says to me to be patient. In the meantime I’ve lost 25% of a portfolio that was extremely fruitful until January of this year. Please give me guidance on working with a broker, finding one who knows how to navigate this market and isn’t mired in some tradition of riding waves. I need one who sees opportunity and knows how to take advantage and get out appropriately.

Answer: The reason your broker is “mired in some tradition of riding waves” is because that’s the one approach that consistently works. It’s the advisors who promise you that they can “see opportunity” and “get out appropriately” that can cost you big time. Advisors who try to time the market — which is what you’re asking them to do — inevitably fail. They might get out in time to avoid the crash but rebounds happen so swiftly that they’ll miss a good chunk of the recovery before they get back in.

There is no reward without risk, and riding out inevitable downturns is how investors get ahead over time. Trying to outsmart the market just leads to extra costs that lower your ultimate returns.

Q&A: All investments involve risk

Dear Liz: I want to protect principal in my modest retirement savings account for future needs. I’ve been in cash and money market funds, but if the recent surge in inflation continues, purchasing power could decrease 25% or more over the next five years. Certificates of deposit and Treasury Inflation-Protected Securities (TIPS) tie money up for long periods and emergency use would result in significant loss. I’ve examined diversifying into real estate, commodities, foreign currencies, gold, but they all go up and down. Can principal be protected from loss and inflation?

Answer: No.

Investments that protect your principal typically have returns that trail inflation. Even though your principal is protected from one kind of loss, you’re all but guaranteed the loss of buying power over time. For inflation-beating returns, you need to take some risk.

Young people with decades until retirement should keep most of their retirement savings in stocks, but even those in retirement typically need to have some exposure to the stock market to preserve growth and buying power. A fee-only, fiduciary financial planner could give you individualized advice about how much risk is appropriate for you to take.

Tuesday’s need-to-know money news

Today’s top story: Care about your credit score? Get strategic with card limits. Also in the news: Buy now, pay later traps, and what to know about bitcoin as it approaches $70,000.

Care About Your Credit Score? Get Strategic With Card Limits
Actively managing how much of your credit limits you are using can make a big impact on your credit score.

Watch Out for These Buy Now, Pay Later Traps
Among its pitfalls, buy now, pay later can tempt you to take on too much debt, and it may not help your credit.

What to Know About Bitcoin as It Approaches $70,000
Bitcoin is trading near all-time highs and crossed a record $68,000 at the beginning of this week.

Thursday’s need-to-know money news

Today’s top story: How gratitude can help your financial life. Also in the news: What’s being fixed with student loan forgiveness, a new Smart Money podcast deep dive on investing strategies, and what happens when you’re too sick to pay your credit card bills.

How Gratitude Can Help Your Financial Life
Taking stock of what you have.

Student Loan Forgiveness: What’s Getting Fixed?
Public service loan forgiveness is being repaired.

Smart Money Podcast: Nerdy Deep Dives: Investing, Part 3
Exploring investment strategies.

I Was in a Coma and Couldn’t Pay My Credit Card Bills
After a medical emergency, your card issuer may be able to make accommodations to lessen the financial strain.

Thursday’s need-to-know money news

Today’s top story: Don’t let Social Security steer you wrong. Also in the news: 3 times to think twice about paying for your kid’s college, a new episode of the Smart Money podcast on investing, and how to spot the signs of a better market for homebuyers.

Don’t Let Social Security Steer You Wrong
When to claim benefits is a complex decision. Don’t rely on the help line staff, and consider getting a pro’s help.

Pay for Your Kid’s College? 3 Times to Think Twice
Don’t take on college debt for your child if your financial health will suffer when your kid doesn’t pay the bill.

Smart Money Podcast: Nerdy Deep Dives: Investing, Part 1
Exploring your personal money background and how it can affect your investing choices.

The Property Line: Watch for Signs of a Better Market for Buyers
Home buyers can track the number of offers, days on market and inventory to see whether the market is becoming more favorable.

Q&A: Investing a windfall

Dear Liz: My husband and I are retired and recently inherited a large sum of money. We already have money of our own invested and have a good income. Would a whole-life insurance policy based on an index account be a good place to put this money?

Answer: The insurance agent trying to sell you that policy certainly thinks so, because it’s an expensive product that would generate a substantial commission. You’d be smart to get a second opinion from a fee-only financial planner that doesn’t profit from the investments they recommend.

Thursday’s need-to-know money news

Today’s top story: What Biden’s free college plan could mean for you. Also in the news: Overrated travel gear that you should (probably) never pack, what to do with extra money, and how to get a refund on federal student loan payments you made during the pandemic.

What Biden’s Free College Plan Could Mean for YouThe president announced plans for more student aid, including free community college and higher Pell Grants.

Overrated Travel Gear That You Should (Probably) Never Pack
Don’t waste money or suitcase space on these unnecessary items for travel.

What to Do With Extra Money
Extra cash is great, but what should you do with it? Investing is often the answer.

How to Get a Refund on Federal Student Loan Payments You Made During the Pandemic
It’s your money until the moratorium expires.

Q&A: Where to find the most bang for your savings buck. Spoiler: On Wall Street

Dear Liz: I recently sold my home and want to put away funds for my daughters. I want to place $130,000 each in an account that will earn 7% to 10% interest for 30 years or so, providing them with a comfortable retirement fund. I’m thinking of having them start with a low-cost index mutual fund. What are the drawbacks to placing all of the funds in one mutual fund account?

What are the tax implications?

Answer: Stock market index funds mimic a benchmark, such as the Standard & Poor’s 500. That means you’re typically getting at least some diversification, which can help reduce the volatility of your investment.

You could reduce volatility even more by including bond market index funds, or opting for a target date fund that spreads the money across a mix of investments — stocks, bonds, cash. Target date funds are labeled with a specific year in the future and gradually reduce risk as that date approaches. Or you could consider a robo-advisor, which uses computer algorithms and ultra-low-cost exchange-traded funds to create and manage a portfolio.

These investments typically will generate taxable returns, so you’ll want to discuss the implications with a tax pro.

Also, you mentioned earning interest, but interest is what is paid on bonds and savings accounts. Returns are what investors earn on stocks and other higher-risk investments. No investment currently pays 7% to 10% interest. Over time, stocks typically generate average annual returns of 8% or so, but returns aren’t guaranteed and some years your stocks may lose money.

Monday’s need-to-know money news

Today’s top story: Does Medicare cover COVID testing and vaccines? Also in the news: A new episode of the Smart Money podcast on procrastination and paying student loans vs investing, 3 ways COVID has reshuffled our finances, and how the car you drive can raise your auto insurance rates.

Does Medicare Cover COVID Testing and Vaccines?
In general, Medicare and Medicare Advantage plans cover COVID-19 tests, treatments and vaccines.

Smart Money Podcast: Procrastination, and Paying Student Loans vs. Investing
How to stop procrastinating on big money tasks.

3 Ways COVID-19 Reshuffled Our Finances
Three financial trends we can chalk up to the coronavirus pandemic.

How the Car You Drive Can Raise Your Auto Insurance Rates
The cost of your car isn’t the only way your vehicle affects your auto insurance bill.

Thursday’s need-to-know money news

Today’s top story: How to prioritize debt payments in the pandemic. Also in the news: The fairness of airline fees, the influence of 2020 on investing, and how to avoid paying certain car dealership fees.

How to Prioritize Debt Payments in the Pandemic
The rules have changed.

Ask a Travel Nerd: Are Airline Fees Fair?
The process of buying a plane ticket can be misleading because you aren’t shown all of the fees upfront.

Will 2020 Make Us More Empathetic Investors?
Investment dollars can make an impact, so be sure your impact is a good one.

Avoid Paying These Car Dealership Fees
Know which fees you have to pay, which ones you can negotiate, and which ones you can avoid altogether.