If anything has been reaffirmed for me during the stock market plunge the last two weeks, it's that if you need the money soon, don't invest it in stocks. I've been a little loose with this rule buying up Apple and Google with some extra cash, and it costs me. I got out of Google at $400, taking a 16% loss - Google is not around $350. I waited too long on Apple, and now I must wait for a rebound - my current loss is 36%. So, here are the rules I should have played by, and it would have made for a much calmer week:
1) If you need the cash in the next 12 months, invest in a money market account
2) If you need the cash in next 12-24 months, invest in CDs or bonds/t-bills
3) For a term longer than 2 yrs, consider a mix of the above plus lower risk mutual funds
4) For retirement use your IRA/401K account and get risky- in my case, I don't need the money for 40 years - and that is a long time in market standards. Knowing that your funds have 4 decades to mature can give you some peace of mind. Plus if you get nervous and want to pull the money back into your checking/savings you'll be rebuffed by the tax penalty. PS. I've lost 30% of my retirement fund this year - I can't imagine the pressure on the millions of people who were planning to retire soon or already retired...
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As a follow up to this post, as an alternative to a money market account (mine is currently yielding 1.6%), ING Direct has a product called Orange Savings Account. It links to your current checking or savings account and allows you to move money back and forth between the 2 accounts. While your money is in the Orange account, it will make a much higher percentage interest than money market or regular savings accounts. Currently it is 2.75%. Check it out if you get a chance. I will be implementing this shortly.
http://home.ingdirect.com/products/products.asp?s=OrangeSavingsAccount
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