Kyle and I have a decision to make! We have some subsidized and deferred student loan debt (i.e. sitting at 0%) and we also have the full amount of money we need to pay off these loans set aside. Most of that money is invested in mutual funds, but about $6,000 is in a CD that is maturing this month.
When we first allocated our savings, we knew we should be conservative because we had a short time frame. Our original investment was two years ago and we had a timeframe of 2-3 years. So we put a good chunk of the money in a CD, invested most of the rest in conservative (rating “2” in Vanguard) mutual funds, and put the final few thousand into stock ETFs. We were willing to take some risk in exchange for the experience of investing, but maybe we were also engaging in some market timing. It was early summer 2011 and all the media coverage was focused on the debt ceiling crisis. We were fairly confident that the economic recovery was well underway and that the US was not going to double-dip. We did lose a bit of money in the first few months after we made the investment, particularly in our international stocks, but it’s been up and up since then.
Now with the CD rolling over and me closing in on graduation (and therefore needing to divest the money to pay the loans), we can make another set of decisions about this money. Seeing the money we’ve made on the portion of the student loan money we invested makes me really want to throw the money from the CD into the market as well, particularly the more aggressive investments. But I know that is using past performance to predict future returns – a classic mistake. We could go the opposite way, too – cash in all the investments now to lock in the gains on the thinking that there will be a “correction” following the recent all-time highs.
I’m not sure how to make this decision without allowing the recent past of the market to influence us! We could sell now because our timeframe is short and now is when we have to make the decision about the CD, which is unrelated to the current market happenings. We could also stay all in until the bitter end – my graduation date is also unrelated to the market moves. I wish we had set out a plan for divesting from the beginning of this investment exercise!
Maybe it’s not too late to make a plan that avoids market timing as much as possible. We can sell a bit now, most when Kyle graduates, and the rest when I graduate. We need to make a plan for the specific funds to sell; all of them had minimum balances to open so I assume we can’t reduce the fund balance below the minimum.
It’s so tempting to let my attitude on the market (bullish) influence our decisions but I know that would be foolish!
What would you do with savings if you need it in a year? Do you engage in market timing or what are your strategies to avoid it? Have you ever divested some savings for a short- or mid-term goal?
photo from Free Digital Photos