This week’s picks for the best in personal finance from around the web.

Market turbulence serves as a reminder to tread lightly (NY Times). This is a good time to remember some of the most essential principles of investing.

What breaking the 200-day moving average for stocks really means (MarketWatch). It’s a metric that’s been talked about a lot this week. Find out more about what it means and why it matters.

The case for quitting your job (Wall Street Journal). Recommended reading, even if you like your job.

Beware of shifting options within Medicare plans (NY Times). How to avoid getting paralyzed by all the choices.

A 401(k) Conundrum: Can You Make Cash Pile Last for Life? (Bloomberg). And you thought building the pile was tough.

And from the blogosphere…

How scared should investors be? (Total Return – a Wall Street Journal blog). A man who knows his bubbles doesn’t see one right now.

What are the odds we’re heading toward another crash? (A Wealth of Common Sense). An oxymoron investors have to live with: “healthy correction.”

Here’s what to say when you don’t know why the stock market fell (The Upshot – a NY Times blog). Profit taking? Ah, no.

The importance of ignoring the noise of the market (The Sketch Guy – a NY Times blog). This point is worth repeating again and again, and besides, this post makes it in an especially humorous way.

The poison of the prosperity gospel (Randy Alcorn). It packs pews, but deceives hearts.

We’d love to hear your responses to any of the above. To weigh in, just meet us in the comments section.

Matt Bell

By Matt Bell

Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.

It’s getting a little stormy out there on the market seas, which often feels uncomfortable and scary. Experienced investors expect times like this, but that doesn’t mean they like them.

Especially during such times, we all need to understand two realities about risk tolerance.

Your risk tolerance might not be accurate

The first reality check is that market downturns help us find out whether the risk tolerance assumptions we built into our investment plan during better times were accurate. During bull markets, it’s easy to think of yourself as a risk taker. But when the market changes direction, your feelings about risk may change as well.

Your risk tolerance really shouldn’t change based on market conditions. So, if it, in fact, did change recently, that probably means it wasn’t accurate in the first place.

All of our strategies except Dynamic Asset Allocation (DAA) require that people determine their optimal asset allocation by taking our investment temperament quiz (membership required) and then pairing their risk tolerance with their investment time frame. (The “Dynamic” part of DAA refers to the fact that the strategy, in essence, has users change their asset allocation as market conditions change, whereas with the other strategies a user’s asset allocation stays the same throughout a given year).

Our investment temperament quiz helps people determine whether their risk tolerance makes them a Daredevil, an Explorer, a Researcher, or a Preserver. How that temperament matches up with your investment time frame determines your optimal asset allocation between stock funds and bond funds.

This might be a good time to retake the quiz and see if your risk tolerance really is what you assumed it to be.

Time frame trumps risk tolerance

While risk tolerance certainly informs a person’s ideal stock/bond mix, the reality is that time frame is of greater importance.

To invest in the stock market requires a willingness to accept some degree of risk, perhaps more than newer investors realize. Someone right out of college, or anyone with more than 20 years to invest for that matter, simply can’t say I want to invest but I don’t want to take any risk. When you have that much time, playing it super safe is the riskiest thing you can do. If you park your retirement funds in a CD, inflation will likely outpace the interest you’ll earn.

That’s why for anyone with more than 20 years to invest, no matter what the quiz says about their risk tolerance, our asset allocation matrix calls for a 100% allocation to stocks. It’s only when you have less than 20 years to invest that the matrix begins to call for the use of bonds.

By the same token, someone without much time to invest can’t afford to throw caution completely to the wind. However, even for people in their later years of retirement, we would only recommend a 100% bond allocation to the most conservative investors. Most investors, even in retirement, need to maintain a healthy allocation to stocks. That’s because of increased longevity; most older investors need to continue accepting some degree of risk in order to give themselves the best opportunity to generate the investment returns they’ll need.

How has the market’s recent performance impacted your view of risk tolerance?

Matt Bell

By Matt Bell

Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.

This week’s picks for the best in personal finance from around the web.

Volatility is back and there’s no place to hide (MarketWatch). It’s getting a little stormy out there.

Is market funk based on fear or fundamentals? (USA TODAY). Is it a passing storm or a sign of bigger storms to come?

Big US firms boost equity weightings in 401(k) target-date funds (CNBC). The concept behind target-date funds sounds solid; it’s the reality that raises questions.

Gift and estate taxes: why you might never owe a penny (Morningstar). Good news for those with a lot to give, and those who stand to receive it.

Don’t let your stuff own you (Relevant Magazine). A 40-day challenge. Who’s in?

And from the blogosphere…

4 reasons why things will get better in the markets (Business Insider). For those needing a pep talk after some rough days.

Forecasting your emotions (A Wealth of Common Sense). One type of prediction investors should make.

It’s always the same novel (Pragmatic Capitalism). Beware the bearer of new investing ideas.

Real estate investing offers only one likely outcome: a low return (The Sketch Guy – a NY Times blog). For anyone who’s ever considered buying an investment property, reasons to reconsider.

Time to buy a deferred income annuity? (Can I Retire Yet?). We wrote about deferred income annuities recently. Here’s one person’s experience shopping for one.

We’d love to hear your responses to any of the above. To weigh in, just meet us in the comments section.

Matt Bell

By Matt Bell

Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.

My family is planning a vacation to a certain theme park that, of course, has roller coasters. Good grief! What was I thinking when I agreed to the trip?

My dislike of roller coasters is legendary. As a kid, I remember going to a theme park under the duress of relentless peer pressure and telling people afterward that my favorite “ride” was the nickel root beer stand. I wasn’t kidding.

As our upcoming trip draws closer, I’ve been reliving the few horrifying roller coaster rides I’ve been coerced into taking, especially that feeling when the coaster is inching upward—ever, slowly upward—and then, of course, the “I’m-surely-going-to-die” drop that follows. I honestly don’t understand the appeal of going to a place that shakes you down at the door to the tune of a mortgage payment and then terrifies you under the guise of entertainment.

While my fear of sudden downward plunges on a roller coaster is as real for me as ever, I noticed yesterday that I’ve pretty much conquered my fear of falling stock markets. Yesterday’s more than 270-point plunge hardly fazed me at all. Having ridden my share of stock market roller coasters, I haven’t always taken such scary rides in stride.

A change of heart

At the risk of sounding like I’m looking for a raise, I honestly believe much of what I’ve learned from Sound Mind Investing after working here for two and a half years has helped me become far less fearful of falling markets. If you’ve been reading the blog or newsletter for even a short while, surely you’ve heard the counsel to develop an investment plan tailored to your risk tolerance and time frame, put it in writing, expect some market turbulence, tune out the noise of market prognosticators, be an investor, not a trader, and trust in the market’s long-term upward trajectory.

But it’s one thing to hear the message; it’s another to take it to heart. People can say they’re comfortable with a certain level of risk. But if they sell their stock funds at the first southward tip of the market, their actions speak more loudly than their words.

More than knowledge

Some people believe wise money management simply requires knowledge and follow-through. If that were true, everyone would be doing just great with the whole money thing. But it isn’t, and that’s why they’re not.

To be sure, knowledge is needed. We need to fill our brains with the right info. But we need to be proactive in matters of the heart as well. If we’re not, our hearts will lead us down the wrong path, for in most battles between the heart and the brain, the heart wins.

The heart is where all the stuff that doesn’t fit on a spreadsheet lives—emotions, attitudes, and perhaps most importantly, identity.

Sound Mind Investing offers objective, rules-based investing strategies. They’re logical, rational. They make sense, and they’ve proven very effective over the years.

It’s good that we’ve kept emotion out of the strategies’ design. But logic alone won’t get you by when things get scary. You also need heart—the heart of an investor, which means your heart trusts your knowledge and at least doesn’t get in the way of following through with what you know to be right.

How do you develop that? In part, knowledge plays a role. Social scientists say that life change is circular. Our attitudes shape our knowledge and behavior at the same time that our knowledge and behavior shape our attitudes. In part, it also comes with experience. It’s one thing to gain knowledge by reading a book; it’s another to live through experiences where you get to test that knowledge. You go from knowing something in your head, to knowing it in your heart.

The makings of a safe landing

When the markets get a little crazy, I sometimes think of Captain Chesley Sullenberger (“Sully”), the pilot of that US Airways jet that lost power in both engines shortly after taking off from LaGuardia on January 15, 2009, who guided the crippled plane to a safe landing on the Hudson River.

If you want to be reminded of what it means to be calm under pressure listen to Captain Sullenberger’s interactions with the air traffic controller.

You can’t miss the cool, composed tone in his voice. That’s the voice of experience, of a pro methodically working through his options and committing to a plan quickly conceived under unthinkable pressure.

But there’s a lot of heart there as well. In this news report about the incident, Sully’s wife referred to her husband’s love of the “art of the airplane.” Another pilot said Sully was, of course, using his instruments, but he was also “feeling the airplane.”

It took both—knowledge and heart—to bring that plane down safely. And it takes both to manage money successfully.

What did yesterday’s downturn tell you about yourself? Was your response shaped by your knowledge of investing? And did your heart trust that knowledge?

Matt Bell

By Matt Bell

Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.

I’m chatting on the radio today with Howard Dayton and Steve Moore of Compass — Finances God’s Way. Our focus is on foreign investing. More specifically, we’re addressing the question: How important is it to have foreign stocks in your investment portfolio?

We discuss why foreign markets may offer good investment opportunities, which ones, how much of your portfolio to allocate to overseas investments, and how to make such investments.

Also on the program, we tackled the following listener questions:

  • “Would I be better off taking a lump sum pension from a former employer or taking it as an annuity?”
  • “I’m almost 60, have most of my investments in stock funds, and have heard I should be reducing risk by tilting my portfolio more toward bonds. However, I’m not comfortable with bonds and don’t even plan to ever retire. Do I need to be making changes to my portfolio?”

To listen to the entire 25-minute program, click the link below.

To read more on this topic, look for the banner, “Investing in Foreign Stocks” on our home page.

To participate in a future program, call in a question at 1-800-525-7000 and mention that it’s for Mark Biller.

Mark Biller

By Mark Biller

Mark Biller is Sound Mind Investing’s Executive Editor. His writings on a broad range of financial topics have been featured in a variety of national print and electronic media, and he has appeared as a financial commentator for various national and local radio programs. Mark is also the Senior Portfolio Manager of the SMI Funds.