How should I invest now?

To illustrate the dilemma you are facing, please take a look at the following chart, which compares the performance of the Vanguard Retirement Income fund (VTINX) with the S&P 500 stock index since October, 2007. You will see that VTINX managed to limit its losses during the stock market crash to a little over 20% as of March 2009 compared with around 60% for the S&P 500.

But you say you can’t withstand more than 10%-15% volatility, and VTINX lost more than this during the crash. In order to get your worst case scenario losses down to 10%, you would have to put about half of your investments into a money market fund or CDs and put the other half into an extremely conservative mutual fund like VTINX. To get 15% volatility would require roughly 30% in cash and 70% in VTINX or something similar.

So your target volatility is definitely achievable, but requires you to invest like an extremely conservative senior citizen. Depending on your exact financial circumstances, it may also put your retirement goals out of reach. You would be sacrificing most of your potential profits until you reach retirement age in about four decades in exchange for safety of principal. Only you can decide if this safety makes sense, given your financial goals and risk tolerance.

The alternative is to accept the fact that it may be impossible to completely shield yourself from the effects of a major crash and tolerate a worst case volatility of more than 15%. Good luck with your investments, whatever you decide.

amok

gld

Read the Intelligent Investor by Benjamin Graham. You are doing great and this book will help you grow as your nest egg as you grow. You are right to have low volatility tolerance so invest largely in safe and secure bonds and then mix it with value stock. You will find the formula and lots of coaching in the book.