Should I move my IRA funds to cash?

We've been seeing a lot of questions from people about whether they should take their money out of stock investments and put it into cash. If you haven't done so already, it's really too late. The time to move money into cash to protect your principal was last year when the DOW was in the range of 13,900 and the S&P was 1,500. Some people who try to time the market did call that right. But the reality is that few people can accurately time the market.

The big mistake you will make if you sell your stock portfolio now and convert it to cash is the classic mistake of many investors -- you will have bought high and sold low. Unless you do need the cash now (and you shouldn't have been in the stock market if you do), then you'll have to bite this bullet and sell. But, if you are someone who doesn't need the cash now ride this market out.

Generally I recommend to people that they balance their portfolio with these four principles in mind:

1. Any funds that you will need in the next two years should be held in cash or cash equivalents (such as money market funds, CDs)

2. Any funds that you will need in the next three to five years should be in bonds and gradually converted to cash as you get closer to needing those funds.

3. Any funds that you will need in the next five to 10 years should be in less volatile, blue chip stocks. These stocks should be converted to bonds as you get closer to the period of needing them in five years.

4. Any funds that you will need in 10 years or more can be in riskier stocks that you plan to hold for the long term. These stocks should be converted to safer, less volatile blue chips as you get closer to needing the money in less than 10 years.

If you follow these principals you should be able to avoid the type of panic selling we're seeing right now - getting out no matter what the loss.

There's no doubt this is the worst market that we have seen in 30 years, but it will recover. So why lock in a loss if you don't need the cash? Remember, Warren Buffett sees the current panic as a great time to buy -- as do many successful value investors. So hang in there and don't take your losses unless you truly need the cash.

Lita Epstein has written more than 25 books, including the "Pocket Idiot's Guide to Investing in Mutual Funds" and the "Complete Idiot's Guide to Value Investing," due out in January.
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