Bear market questions: Is it a good time to invest in stocks?
This fall, Vanguard has presented a series of meetings on the bear market in stocks. In this second part of a two-part series, we've compiled answers to the most frequently asked questions, and hope you'll find them helpful.
Question: Is it a good time to get fully invested in stocks since the stock market was beaten down so much?
Answer: Because future returns cannot be anticipated, Vanguard believes that investors should not change their investment strategy in response to short-term market movements.
Question: Are international funds a safe investment at this time assuming money is not needed for about 10 years?
Answer: International stocks tend to be riskier than U.S. stocks. Fluctuations in the value of the dollar can increase or depress international returns, and unfavorable political or other developments can send values down. For this reason, consider having international stocks represent a smaller holding than U.S. stocks in your investment account.
Question: Are there any immediate tax implications of moving funds around within my portfolio?
Answer: You will not owe taxes on any exchanges you make within a tax-deferred account, including your employer's plan or an IRA. You owe taxes only when you withdraw funds from these accounts.
If you plan to move funds within a taxable account, you may wish to consult with a tax advisor, as you may incur taxable capital gains.
Question: How much should I keep in short-term reserves during these economic times?
Answer: Financial planners recommend that you have an emergency fund with enough money to meet three to six months of your normal household expenses. Consider investing this money in short-term reserves, which can include a money market fund, savings account, or certificate of deposit (CD). If a person is retired, they might have as much as two years of living expenses in short-term reserves.
Vanguard generally believes that you should not consider investing in short-term reserves within a retirement plan account because they are not typically good for long-term investors. Their returns have barely exceeded inflation (see table), and most investors need their retirement money to grow at a higher rate to afford this long-term goal.
Bank deposit accounts and CDs are guaranteed (within limits) as to principal and interest by the Federal Deposit Insurance Corp., which is an agency of the federal government.
Long-term returns on stocks, bonds, and short-term reserves, 1926–2007
The performance data shown represent past performance, which is not a guarantee of future results. Unlike stocks and bonds, U.S. Treasury bills are guaranteed as to the timely payment of principal and interest. U.S. government backing of Treasury or agency securities applies only to the underlying securities and does not prevent share-price fluctuations. Index performance is not illustrative of any particular investment because you cannot invest in an index. All funds are subject to risks. Investments in bond funds are subject to interest rate, credit, and inflation risk. Returns for stocks are based on the Standard & Poor's 500 Index from 1926 to 1970, the Dow Jones Wilshire 5000 Index from 1971 to April 22, 2005, and the MSCI US Broad Market Index thereafter. Returns for bonds are based on the Standard & Poor's High Grade Corporate Index from 1926 to 1968, the Citigroup High Grade Index from 1969 to 1972, the Lehman Long-Term AA Corporate Index from 1973 to 1975, and the Lehman Aggregate Bond Index thereafter. Returns for short-term reserves are based on the Citigroup 3-Month Treasury Bill Index.
Source: The Vanguard Group.
Question: Yesterday I changed my investment mix before the market opened. From the value of my 401(k) fund shown this morning, it looks like the change wasn't made until about the time the market closed. What is the time frame from when a change request is submitted to when the change is actually made?
Answer: All mutual fund sales and purchases are completed once a day, after the New York Stock Exchange has closed. Generally, any order received by Vanguard Monday through Friday before 4 p.m., Eastern time, will be executed that night. Trades received after 4 p.m. or on weekends are made after the market closes on the next business day.
Question: During all the turmoil last week I moved my money to an all-bond fund. I now think that was a mistake and I would like to get back to my former funds. I was told that I cannot do that for two months. Can you waive that policy in this case?
Answer: No. Federal regulations require that mutual fund companies limit frequent trading, which can unfairly saddle a fund's long-term investors with extra costs from buying and selling securities. That's why Vanguard requires you to wait 60 calendar days to repurchase shares in a stock or bond fund you’ve sold, or to buy a different fund with similar investments if it is available.
Question: Does Vanguard change the balance in its Target Retirement Funds in response to the bear market to make them safer?
Answer: No. Each fund has a target investment mix to maintain, such as 65% stocks and 35% bonds. When stock values drop, these funds would buy stocks to maintain their intended investment mix. This disciplined strategy allows these funds to acquire more stock shares when prices are lower. Later, if the market recovers, these prices could seem like bargains.
Question: I am a new employee and have not enrolled in the 401(k) plan to date. Should I start the process now or just wait?
Answer: It's important to save for retirement throughout your working life. It may be unwise to put off saving because of market conditions. Besides, with stock prices down, your contributions will buy more fund shares than they would have only a short time ago.
Question: Is Vanguard financially sound?
Answer: Yes. We provide investment management, administrative, and other services to the Vanguard funds. This business requires relatively modest amounts of capital. We have no exposure to the kinds of investment-banking businesses and proprietary trading that have shaken Wall Street. We don't borrow money to leverage, or magnify, investment returns in our stock, bond, or money market funds.
The Investment Company Act of 1940, which established the framework for mutual fund regulation, provides reassuring answers to common questions.
Each mutual fund is a separate entity from every other fund. Losses in one fund will not affect another. A fund's assets are the securities it holds. The value of these assets rises and falls based on activity in the financial markets. As a mutual fund shareholder, you share in these gains and losses, proportionate with your investment in the fund.
All of Vanguard's money market funds have agreed to participate in the U.S. Treasury's Temporary Guarantee Program for Money Market Funds (the "Program"). The Program is intended to provide coverage to shareholders for amounts that they held in participating taxable and tax-exempt money market mutual funds as of the close of business on September 19, 2008, and is due to expire on December 18, 2008, unless extended by the Treasury. It is important to note that if a customer closes his or her fund account, any future investment in the fund through a new account will not be guaranteed. Any increase in the number of shares an investor holds after the close of business on September 19, 2008, will not be guaranteed. If the number of shares an investor holds fluctuates over the period, the investor will be covered for either the number of shares held as of the close of business on September 19, 2008, or the current amount, whichever is less. For more information, please see the Fund's most recent prospectus as supplemented on October 8, 2008.
Target Retirement Funds are subject to the risks associated with their underlying funds.
All investments, including a portfolio's current and future holdings, are subject to risk.
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