Safe Money in Tough Times: Questions and Answers with Jonathan Pond

My wife is a public broadcasting fanatic. I recognize its value, but mostly I just tolerate it. (I often joke that NPR is “noise pollution radio” — I can't think when it's on.) Usually the television pledge breaks annoy me, but one night last week, the local station employed a clever tactic. They had a financial expert answer viewer questions between pleas for more money.

Jonathan Pond bills himself as “America's financial planner”. He runs a financial planning firm in Boston, but last Tuesday he was here in Portland, Oregon, fielding questions from the folks who called in to pledge money to public broadcasting. (Pond was also giving away copies of his new book, Safe Money in Tough Times.)

The questions Pond answered were a lot like the questions I've been receiving here at Get Rich Slowly. I don't have time to answer most of the questions readers submit, and some are beyond my ken. (Remember: I'm just an average guy.) When I realized that a financial expert was going to tackle topics of interest to my readers, I grabbed a pad of paper to take notes. I've reproduced some of the most interesting responses below.

Does diversification still work? It seems like the rules have changed over the past year.
The biggest risk in investing is taking no risk at all. The diversification rules have not been thrown out the window. The actual problem is that people were not diversified before the crash. Many folks had put all (or most) of their money into stocks. The solution isn't to now just over-load in the other direction. Diversification and asset allocation are about finding balance.

This seems like a once-in-a-lifetime opportunity to invest in stocks, but my friends think I'm crazy for wanting to do so. They think I should stay away from them. What do you think?
If you're any sort of contrarian, now's a great time to get in, a little at a time. Use dollar-cost averaging. Think about 10 years from now. Do you think the market will be lower or higher? Unless you need the money soon, don't think about where the market will be next year, but where it will be in a decade.

It seems like there's no safe place for my money now. Is there any safe place to still get a decent return?
There are four relatively safe places to put your money right now and still get an okay return:

• U.S. government money market funds
• Certificates of deposit
• Treasury inflation-protected securities (TIPS)
• Municipal bonds

In fact, Pond believes that this is a once-in-a-lifetime opportunity to pick up high-quality municipal bonds. (I've seen similar sentiments in big money magazines lately, too.)

How much should I set aside for emergencies?
In this difficult market, if you're a retiree, you should have two years worth of money set aside. If you're young and working, you can get by with less.

I was 100% in stocks, and have lost a lot of money. I still haven't diversified (am still 100% in stocks). I'll retire in 5-7 years, and will need the money then. Should I stay in stocks (to maximize possible returns) or should I diversify?
Diversify. Five to seven years is too short a time to be wholly invested in the stock market. If your time horizon were longer, you might be able to do that, but the sooner you need the money, the more important diversification is.

My employer is going to suspend the company match to our 401(k) plan. Should I continue contributing to the 401(k), or should I contribute elsewhere?
Keep contributing to the 401(k) unless you anticipate tough times. Dollar-cost average. Dollar-cost averaging is a good strategy, and now especially is a great time to do it. They key to creating what you need for retirement is to contribute regularly, and to increase contributions when you can. Also, invest in yourself. Get more training. Use your brains. Make yourself more valuable to your company. [J.D.'s note: Pond's advice is good, but I think he missed the point of the question. I think the person meant, “Should I switch from a 401(k) to a Roth IRA?”]

We're nearing retirement, but we're not well-prepared. It was a challenge before the recession, but it's even worse now. What should we do?
It will probably cost you less to retire than you think. Don't listen to the talking heads who say that it will cost you 80%, 90%, 100% of your income. You can do it on 60% of pre-retirement income. If you're really pinched, downsize your house. You might have to relocate to a less expensive region of the country. Also consider delaying retirement, or retire gradually. Delaying retirement by five years can make a huge difference.

My 401(k) is disappearing. What do I need to look for when investing in mutual funds?
Many people unwittingly put all of their money into stock mutual funds. If you lost more than 40% last year, you probably don't have enough diversification. Don't give up on your 401(k), but do make sure that your investments are diversified.

Interest rates on CDs and returns on mutual funds are way down. A friend told me about an investment guaranteed to return 14%. Do you think this is legit?
People are attracted to easy money. They want to get rich quick. But there aren't any legitimate investments that guarantee 10% or 15% a year. If something looks too good to be true, it probably is. One way to check is to show it to some friends that you trust and see what they have to say.

Should I cash out my IRA to pay for a child's college education?
It's never a good idea to cash out an IRA for college. It's never a good idea to stop contributing to them, either. There are other sources of college financing: loans and other financial aid. Save what you can, but don't mortgage your own future for your child's college education. [J.D.'s note: Trent just wrote about this last week.]

With the state of the economy, is it better to pay down credit card debt or to build savings?
Right now, it's probably best to slow down debt repayment to build savings. In this economy, slowing down on credit cards may actually make sense in order increase the amount of emergency savings that you have set aside.

I'm falling behind on my debt. I'm unemployed. I'm having trouble keeping up with my credit card bills. What should I do?
It's important to be pro-active. If you anticipate falling behind, contact your creditors before they contact you. They can't work miracles, but many will have programs to help. Go to a legitimate credit counseling organization, not the sort you see on informercials. Use bankruptcy as a last resort, but don't go to a bankruptcy attorney (because they're going to think you should choose bankruptcy). Get an objective opinion.

Conclusion
Most of the advice coming out of reputable financial planners nowadays is very similar: Don't panic, diversify, know your investment time horizon. They emphasize the fundamentals: spend less than you earn, have an emergency fund, etc. None of this is revolutionary, of course, but that's because there are no magic bullets. I'm surprised at how many people complain about this advice. They think it's facile because it's basic; they want something inventive or new. But you know what? The basics are the basics because they work. Most of the time, when you stray from the proven path, you put yourself at risk for financial disaster.