Don't Let Iraq Throw Your Investing Off Track

If you haven't looked at your allocation lately, now is a good time to bring it back in line. If you started 2002 with $5,000 in a broad stock market fund and $5,000 in a diversified bond fund, your portfolio would have had 42% in stocks and 58% in bonds at the end of 12 months. By rebalancing back to a 50/50 mix, you're keeping the portfolio from becoming a little too conservative. And you're taking some profits in bonds and putting some money into stocks, which look reasonably priced right now.

But maybe you're also investing to, say, buy a home or send your kids to college. If you're absolutely going to need your cash in at least the next five if not 10 years, then it shouldn't be in the stock market. You should sock that dough in short-term Treasuries or a money market fund.

With interest rates still at generational lows, you aren't going to make anything in a money market fund, but you won't lose any dough either.

But not all bonds are created equal. You should avoid going on a hunt for higher yields. You can and will lose money in longer-term Treasuries -- at least over short periods of time. As rates rise, the prices on those bonds can fall hard. Vanguard's Long-Term U.S. Treasury fund fell 7% back in 1994. And you cannot afford to lose even that much if you're just months away from coughing up a down payment.

Overloading a portfolio with your own company's stock can be even more dangerous that overdosing on bonds. You already work for that company. If it falls on hard times, you can lose your nest egg and your job all at one time. You shouldn't have more than 10% of your retirement money in your own company's stock. Period.

Sock It Away

Some people are simply going to have to change their behavior to make up for losses they've suffered during this bear market. That means saving more and spending less.

The savings rate in this country is much higher than it's been in about four years. In the fourth quarter of 2002, people socked away 4.3% of their income. A year earlier, the savings rate was closer to a paltry 1%.

And saving is going to become even more critical for people who work at companies that are eliminating their matching contributions in 401(k) plans. As one example of many, Charles Schwab(SCH Quote) just announced that it will no longer match employee 401(k) contributions.

The only solution is to save, save and then save some more.