By Quentin Fottrell
Stocks rebounded on Wednesday after Trump announced a 90-day pause on country-specific ‘reciprocal’ tariffs
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Dear Quentin,
I’m a biologist trying to understand finance. What should I do with a $600,000 inheritance from my father? I’m single with two young adult sons who are in college. I make a low salary, but the college tuition is free, which is why I’ve stayed where I am.
I have a chunk of money from my father’s estate. My investments are losing money fast due to the current economic situation. I called my financial adviser and said this is not within my tolerance level. I can’t let those investments melt to nothing.
My adviser is trying to talk me into putting “blinders” on, riding it out and letting the market recover over the next decade. I’m in my 50s and I don’t see that as a good option. These funds are currently in a 60/40 stocks/bonds mix.
I’m thinking of moving all $600,000 into bonds for a low- or no-risk yield or pay off my home and purchase an annuity that pays me an income. What would you do in my position? Any input would be greatly appreciated.
Feeling Grateful, But Nervous
Related: I’m 5 years away from retirement. I moved my money into non-U.S. stocks and blue-chip funds. Was this wise?
Dear Nervous,
If you ride every session like a Coney Island roller coaster, you will be physically and emotionally drained by the end of the week.
Still, no wonder you’re feeling antsy. You’ve inherited a great deal of money and you are a novice investor. Plus, this has all happened at a dramatic and tumultuous time for global stock markets. Think about the confluence of those three factors. Add to that your very low risk tolerance and your father’s death. Anyone would be quaking in their boots. You’re allowing your fears and emotions to make decisions for you. That’s why your financial adviser is there, to provide guidance, objectivity and perspective. You’re not going to lose all of your inheritance.
Like millions of Americans, you are experiencing paper losses, but your father had a healthy allocation designed to see you through corrections (a 10% fall from a recent peak) and bear markets (a 20%-plus fall from recent heights). That diversification should also include non-U.S. stocks, small caps and large caps, in addition to cash and bonds (basically IOUs issued by the federal, state and local governments). You need to weather the storm, but remain invested so you can enjoy market returns over the next 15 years before retirement and, hopefully, decades of your retirement.
The S&P 500 SPX, the Dow Jones Industrial Average DJIA, tech-heavy Nasdaq Composite COMP and the small-cap Russell 2000 RUT are having another extraordinary week. The S&P 500 experienced the biggest swing, at least since 1978, rising over 4% on Tuesday before closing more than 1% lower. Not since 1982 has the Nasdaq risen so much during one session only to lose it. Stocks soared on Wednesday after Trump announced a 90-day pause on country-specific “reciprocal” tariffs, but said China will face a new tariff rate of 125%, up from 104%.
If you ride every session like a rollercoaster in Coney Island, you will be physically and emotionally drained.
In financial terms, your 60/40 stock/bond allocation is a moderate approach to risk. It may not feel like that at the moment, but President Donald Trump has introduced a range of tariffs and “reciprocal tariffs” on America’s trading partners, which have hurt the financial markets in recent weeks. They were worse or higher (depending on your point of view) than even most economists expected. People are checking their 401(k)s and reeling; although even that reaction may depend on whether you support the current administration or not.
The bond market is also behaving unpredictably. Amid fears of a recession and rising inflation on the back of Trump’s tariffs, bond yields – or interest rates – have risen. Yields on U.S. bonds headed north this week as investors sold government bonds. When bond yields rise, bond prices fall. This is generally regarded as a bad omen as a lack of confidence in the U.S. economy translates to a lack of confidence in U.S. Treasurys, including 2-year Treasurys BX:TMUBMUSD02Y, 5-year Treasurys BX:TMUBMUSD05Y and 10-year Treasurys BX:TMUBMUSD10Y.
Moving your inheritance to bonds may allow you a good night’s sleep, but it will underperform in the long term. A balance of lower-risk assets like bonds and higher-risk assets like stocks provides a cushion against volatility, according to the Vanguard Group. “While stocks offer higher expected returns over the long run, they can experience substantial short-term swings. High-quality bonds, on the other hand, tend to generate lower returns but may provide stability. A diversified portfolio reduces overall risk while still allowing for long-term growth potential.”
Stocks outperform bonds
J.P. Morgan Asset Management says non-cash asset classes are typically more reliable investments even during periods of high uncertainty. “After a selection of economic and geopolitical shocks dating back to 1990, a 60/40 portfolio of equities and government bonds has outperformed cash 75% of the time over a one-year horizon, and always over three years,” analysts Maria Paola Toschi and Natasha May say. The calculated average excess returns above cash of 9 percentage points over one year and over 20 percentage points over three years.
There are some extremely bearish/pessimistic views out there. The notoriously pessimistic and, yes, famously successful investor, Mark Spitznagel, made a dire prediction this week. “I expect an 80% crash when this is over. I just don’t think this is it. This is a trap,” he wrote in commentary to MarketWatch on Monday. Yves Lamoureux, president of market-research firm Lamoureux & Co., who warned in October that market participants were not taking the tariff threats seriously enough, sees upside surprises to the market and sees it continuing higher.
Holding all of your investments in cash and bonds will not protect you against that stealthy midnight thief: inflation.
As for annuities, fees can be as much as 10% of the value of your contract. “Typically, the more complex the annuity, the higher the commission,” according to Annuity.org. “The commission on a 10-year fixed index annuity ranges from 6% to 8%.” They can include commissions, administrative fees, mortality expenses, and surrender charges. If you withdrew $20,000 you could pay 5% or $1,000, which applies to the entire annuity withdrawal amount. “If you withdraw $50,000 instead of $20,000, your fee would rise from $1,000 to $2,500,” Annuity.org adds.
For those considering an annuity, they are betting that they will live a long life. But what if you die before the full annuity has been paid? If you do not have the kind of annuity that will pay the remainder to your family, tough luck. You lose the bet – and the insurance company wins. (Other annuities are not “annuitized”, meaning they don’t have a monthly pay component.) You could face an IRS withdrawal fee if you try to take money from your annuity before you are 59 1/2. Research suggests most financial professionals do not recommend annuities to their clients.
Beware of cashing out your shares, especially in a down market. Holding all of your investments in cash and bonds will not necessarily protect you against that other stealthy midnight thief: inflation. Historically, returns on stocks beat cash and bonds over the long term. While investors are losing money on their 401(k)s in a stock-market downturn and may see the value of their homes drop during a recession, cashing out is permanent. For those who hold their nerve, history has shown that their shares and homes will most likely regain their value.
Related: Amid the market carnage, I’m selling all my worldly belongings. Is that wise?
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on X, the platform formerly known as Twitter.
The Moneyist regrets he cannot reply to questions individually.
More columns from Quentin Fottrell:
My portfolio lost 20%. With Trump’s trade war, do I sell my stocks and buy gold?
Will Trump’s policies lead to a recession? I’m 62. How should I invest $100,000?
‘I’m not being a troll’: I bought Trump’s ‘DJT’ stock and I’m down 50%. What now?
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-Quentin Fottrell
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