Define How Long "Long Term" Really Is

The media presents almost a daily dietof stories about retirees who havereturned to work or near-retirees whohave postponed retirement because theirportfolios were decimated by the stockmarket decline. Physician-investors readabout parents forced to send their childrento less expensive colleges than theyhad planned because their stock-heavy529 college savings plans were hard hit.Part of the problem for many physician-investors,of course, has been poor portfoliodiversification.

TIME TO UNDERSTAND

But perhaps the bigger underlyingproblem is a misunderstanding of whatfinancial planners mean when they advisepeople to invest for the long term andsave for the short term.

The concept of saving for short-termgoals is fairly well understood. Most peopletrying to accumulate funds for needs inthe next 1 to 3 years, such as a down paymenton a car or home, a dream vacation,or a computer, don't invest that money instocks or other volatile assets. Instead, theysave in passbook savings accounts, moneymarket accounts, short-term CDs, orTreasury bills.

The confusion seems to come forlonger and usually larger financial goalssuch as retirement and college educationfor children. Take investing for collegeeducation, for example. Families commonlyinvest in taxable mutual funds, educationalsavings accounts, or 529 college savingsplans, which are run by states andusually involve investing in mutual funds.

For a family with young children,these often are good places to invest.College is 10 to 15 years away, and that'sbeen long enough historically to weathermost bear markets. If you're investingregularly, you'll be buying during downmarkets—in essence, buying stocks onsale, which often can help offset lossessuffered during a decline.

But this bear market caught many familieswith children about to enter collegestill heavily invested in stocks. They misunderstoodthe concept of long-term investing,and have been forced to readjust theirchildren's college plans.

SEEKING GUIDANCE

How long is "long term"? Expertopinions vary, but most agree that theuse of money for a specific goal shouldbe at least 5 years away if you're investingin stocks or other equities, and manysay 10 years for money invested in moreaggressive equities such as high techstocks. Once you know you're going toneed the money within less than 5 years,it's time to move that money out of equitiesand into less risky assets.

Take the family with a college-boundchild. When that child is a freshman inhigh school, the family might considermoving at least one fourth of their equity-basedcollege funds into short-term bonds,money market accounts, or CDs. Thisshould ensure that they will have thatfirst-year money to put toward tuition andother expenses. When the child becomes asophomore in high school, consider movinganother one fourth out of the marketand put it into cash, and so on.

Retirees might take the same approach.Within 5 years of retirement, they maywant to be sure they have, in cash equivalents,at least a year's worth of the amountthey think they will need to draw fromtheir nest egg to help pay for their firstyear of retirement. By doing this each year,they should have accumulated 4 to 5 years'worth of living expenses in cash to startretirement. That way, should the marketdecline sharply shortly before or afterretirement begins, they will less likely beforced to postpone retirement, return towork, spend principal, or sell equities atcheap prices in order to meet cash needs.

Of course, there's no guarantee abear market will recover to its previoushigh within 5 years. Some haven't. Butaccording to investment expert JeremySiegel of the Wharton School ofBusiness, stocks historically have beatenshort-term Treasuries 75% of the timeover rolling 5-year periods, and 80% ofthe time over rolling 10-year periods. Byunderstanding "long term," you put theodds in your favor.

This column is produced by the Financial

Planning Association (www. fpanet.org), the

membership organization for the financial

planning community.