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Retirement Planning and Cash Positions July 24, 2008

Posted by retirementwithaplan in Uncategorized.
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This blog post originally appeared on another blog server on 03.24.08

Watching in Horror

As many of us, future retirees and current ones watch in horror as the stock market gyrates on almost any news, as we watch the Fed struggle with the credit crunch, sub-prime defaults and any number of financial missteps, some of which have yet to come to light, we worry that our long-term investments are in jeopardy. And we would be fully justified to do so.

Your mutual fund managers are doing something about it. In an article posted on Bloomberg recently, fund managers are shifting away from buying stocks to selling them and holding on to the cash. The key here is to let them do it and not do it yourself.

Mutual funds do not have the luxury of taking inordinate risks such as their more volatile brethren in the hedge fund world might. Because, not only do they deal with individual investors, mutual fund managers must look at pensions and insurance company investors and make their plans based on a much longer horizon than you might think.

You will do more harm than good by panicking. Your fellow investors will feel the pinch from your redemptions – when you sell shares, the fund must sell stock to cover your exit leaving those left behind in a little worse shape than before. This also creates tax problems for not only those redeeming their shares but for those left behind as well.

As Eric Martin and Alexis Xydias write: “Forty-three percent of managers surveyed this month by Merrill Lynch & Co. moved more money into cash than their funds stipulated, the highest percentage since the New York-based firm began compiling the data in April 2001. Their cash relative to total assets also rose to a five-year high as managers found fewer stocks to purchase and anticipated redemptions.

Stay put. Even increase your pre-tax contributions and let the fund managers do what you pay them to do.

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