My $200,000 retirement fund is sitting in cash because the political situation in the Middle East has me very concerned about the future of the stock and bond markets. How do you think I should be invested if I plan to retire in 30 years? —M.N., West Boylston, Mass.
I don’t think the turmoil in the Middle East should play much of a role, if any, in developing an investing strategy for your retirement savings, especially since you probably won’t even tap that stash for another 30 years.
That’s not to say that the political upheaval and violence there isn’t upsetting. Or that unrest in that part of the world can’t influence the price of all sorts of assets in the short run, oil being an obvious example.
But as far as your retirement nest egg is concerned, the issue is whether problems there are likely to depress your returns over the long-term. A quick look at long-term returns in the wake of past flare-ups in the region suggests that’s not the case.
Over the 30-year span following the 1956 Suez Canal crisis, for example, U.S. stocks returned an annualized 10%. After two other major incidents — the 1967 Six Day War and the 1973 Yom Kippur War — U.S. stocks managed 30-year annualized gains of roughly 12%. Those figures are pretty much in line with the stock market’s annualized return of 10% or so since 1926.
Besides, even if it became apparent that problems in that part of the world were so severe that they’d affect the financial markets for decades to come, I’m not sure what you could do about it.
Asset values adjust instantaneously as millions of investors worldwide react to new information. Even if you were able to figure out which investments were going to be the winners and losers in the years ahead, by the time you scoop them up chances are their prices will already reflect the new reality. Any advantage you hoped to gain would be blunted.
So while I certainly wouldn’t discourage you from following events in the Middle East — or Europe, Asia, Latin America or anywhere else — I also wouldn’t recommend you overhaul your investing strategy every time tensions build in that region or any other.
How, then, should you divvy up your dough in a world where political turmoil or the threat of it is pretty much a constant?
Clearly, going to cash is the wrong move. Cash equivalent investments like money market funds and FDIC-insured accounts provide security, but the returns are too low to create a large enough nest egg to maintain your standard of living once the paychecks stop rolling in.
Stocks, on the other hand, have a track record of providing solid long-term gains. But the stock market also goes into periodic funks, which can be frightening.
So even though you should be more concerned about the potential size of your nest egg at retirement — as opposed to its value next week or even next year — you don’t want to put so much into stocks that you’ll panic and sell if the market tanks.
That’s where bonds come in. Investing a portion of your retirement stash in bonds can help dampen the market’s ups and downs and provide a bit of emotional comfort in times of market distress.
Arriving at a mix of stocks and bonds that can provide sufficient growth and adequate protection is highly subjective. Generally, though, investment pros recommend that investors who still have 30 years of their career ahead of them keep 80% to 90% of their retirement savings in stocks and 10% to 20% in bonds.
If you’re a Nervous Nellie type, you might want to reduce that stock stake to 70% or so. Just remember that the more protection you want from short-term setbacks, the more you’ll give up in long-term returns.
Once you’ve settled on a blend of stocks and bonds that’s right for you, leave it alone except to rebalance every year or so.
When you’re older and capital preservation becomes more important, you’ll want to shift more of your money into bond and, after you retire, bonds and cash.
For now, though, just focus on getting the tradeoff between growth and stability that’s right for you, which you can do by checking out Morningstar’s Asset Allocator tool.
So when it comes to investing your retirement fund, don’t get too worked up about the geopolitical scene. If you pull out of the market every time there’s trouble looming in the Middle East or anywhere else, you’ll probably spend more time sitting in cash than invested in the markets, and end up with an undersized nest egg for retirement.