My wife is an investing wimp
Question: I'm 49 and my wife is 50. We agree on most things, except how much of our investment portfolio we should keep in cash. She is completely risk-averse and focuses only on the "spanking" we took in the market last year. I feel that by letting so much money sit in CDs earning 1% to 2% we're missing out on better opportunities. Currently, we've got about $500,000 in cash as part of an otherwise well diversified portfolio. Can you help me convince her to take half that money and buy into some dividend-paying blue chips? --Garry, Atlanta, Georgia
Answer: I'm shocked -- shocked! -- that you and your wife don't see eye to eye on risk and investments. I'm joking, of course, since there's tons of research showing that when it comes to investing, women are from Venus (whose denizens tend to trade less frequently and hold more conservative portfolios) and men are from Mars (where residents thrive more on pedal-to-the-metal investing strategies and focus more on an investment's reward potential than its risks).
Research by University of California-Berkeley finance professor Terrance Odean, for example, shows that men trade far more frequently than women -- and earn far lower returns. Interestingly enough, however, when Brooke Harrington, a research fellow at the Max Planck Institute and a former assistant professor at Brown University, looked at investment clubs, she found that mixed-gender clubs performed better than men- or women-only groups, largely because they tended to pick a more diversified group of stocks.
So what does this have to do with the situation you and your wife face?
Well, to me it suggests that rather than you trying to convince your wife to do what you think is best (or have me try to persuade her), you and your wife might be better off working together to come up with a compromise that you can both agree on.
After all, it's not like there's only one right answer here. You're trying to manage and invest your money in a way that provides a reasonable return for the amount of risk you're willing to take. And this tradeoff of risk and return is a subjective matter. What's comfortable for you may not be comfortable for your wife.
So I think you and your wife need to sit down and make your respective cases. But both of you need to realize that "winning" in this case isn't talking the other person over to your point of view. It's coming away with a portfolio you can both live with.
Now, part of this discussion can, and should, be touchy feely. By this, I mean that you should let your wife know why it bugs you to be giving up opportunities, and she should explain to you why she puts such a premium on safety and wants to avoid another spanking, in the market.
But you and she should also go over some numbers so that your eventual cash position isn't decided on gut feeling alone. You can start, for example, by figuring out how much of a cash reserve you need. At a minimum, you probably want three to six months' living expenses in cash so you have enough ready money to see you through a job loss or emergency. If you know you'll be buying any big-ticket items like a car or spending on large projects, like a home refurbishing, within the next few years, you should probably set aside those funds as well in a bank money-market account, CD, or high-quality money-market fund.
Once you've figured out how much you need as a liquidity reserve, the next question is how to divvy up the rest of your investments among stocks, bonds, and cash. I'm guessing that at your ages you and your wife are investing primarily for retirement. In that case, the main issue is how aggressively or conservatively you want to invest given the number of years you still have until retirement and how much income you'll eventually need to draw from your assets.
As a rule, the more of your portfolio you devote to stocks, the higher the returns you'll earn over the long run and the larger your nest egg (and eventual retirement income) will be. But as anyone who lived through the last year well knows, a big stock stake means the possibility of big setbacks too. So you and your wife need to understand how different mixes of stocks, bonds, and cash might affect your future retirement security.
You can get a pretty quick sense of that by trying the Morningstar Asset Allocator tool. You can use the interactive sliders to create different portfolios and then see how large a nest egg or retirement income each is likely to generate, as well as how large a loss you might suffer in the short term. This will help you and your wife see what you may be gaining and giving up by investing more aggressively or more conservatively.
If you're willing to put a little more time into this, you can also check out more sophisticated calculators such as T. Rowe Price's Retirement Income Calculator or the myPlan Retirement Quick Check or Retirement Income Planner tools at Fidelity's site. These tools allow you to factor more information, such as 401(k) contributions and projected Social Security payments, into your analysis and give you a more nuanced view of the pros and cons of different investment strategies.
If you and your wife have the kind of confab I suggest and follow it up by running a few numbers, I think you should be able to come away with a mutually agreeable answer to how much of your assets should be in cash. What's more, you'll each come away with a better understanding of how your partner thinks and feels about key financial issues, and that's important not only for achieving economic security but maintaining domestic tranquility too