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Invest for the Long Haul

Question: I'm a 27-year old investor with about $3,000 in a $13,500 retirement portfolio in cash and probably another $1,500 in employer contributions coming in the next few weeks. I'm stumped about how to invest the money (they are all Fidelity accounts by the way) since my existing mutual funds have all lost value and I feel like I'm doing better by just sitting on the cash. Any suggestions? Anna. Oakland, CA.

Answer: Cash will always do well when the stock market is tumbling lower as corporate profits evaporate and bond investors are swept with periodic inflation panics. That's why it pays for everyone to build up their cash holding during tough times like this.

Problem is, you're young and you have a long time to invest for your retirement years.

The recent decline in the stock market is a reminder that stocks are risky--it's the nature of the beast. So should you now steer clear of domestic and international equities because they're too risky? Not at all. Rather than shun equity risk, the right approach would be to continue to include stocks in a portfolio diversified across a variety of assets. Diversification creates a margin of safety. And since no one knows which markets will soar or sink, diversifying gives investors an opportunity to catch the next big market upturn.

Going forward, if you can envision the American economy remaining a leader among major industrial nations, full of dynamic companies and bold entrepreneurs, you'll want to own stocks. If you believe the global economy will continue to expand--despite stomach-churning fits and starts--you'll probably want a slice of international equities.

Life, after all, is risky. Every time you cross the street, you take a risk. But that probably doesn't stop you from reaching your goal on the other side. Saving for retirement is risky, too. Sure, you can put all your money in Treasury bills. They're risk-free, but that doesn't mean your portfolio will be. With their low return (the trade-off for no investment risk), T-bills may not generate enough income to provide adequately for your retirement. That's why you still need to diversify. This will expose parts of your portfolio to volatility, but that's the trade-off you need to make if you want to achieve higher returns for the long haul.

I'd research putting the money in index funds. You could also look the Fidelity target funds, diversified portfolios with different shades of risk designed for retirees looking for a one-stop-shop when it comes to their core portfolio.

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