COVER STORY
CHART YOUR FINAANCIAL COURSE
As the market recovers,
review your 401(k)
and revisit investing
fundamentals
BY DAVID PITT
of The Associated Press
D
ES MOINES, Iowa —
Millions of 401(k) ac-
counts have made up
lost ground over the
last 10 months. Helped by a
stock market surge and contin-
ued contributions, the question
now is how to keep from back-
sliding when market momen-
tum slows or reverses.
With the market up more
than 60 percent since it hit its
low in March, the rapid rise has
many believing that a sharp
downturn, or a correction, as
Wall Street calls it, is likely. The
last thing investors can stom-
ach is the market reversing it-
self and snatching away more of
their retirement money.
So, what to do now?
Don’t forget the fundamen-
tals. Experts recommend revis-
iting the basic principles of in-
vesting, and offer some addi-
tional moves to consider.
A starting point for those who
are heavily reliant on their
401(k) is to make sure their
portfolio reflects their appetite
for risk.
This is a personal choice be-
cause it should be centered on
how much longer you must
work to meet your retirement
savings goal and how comfort-
able you are with losing some of
your money.
A key focus in making this as-
sessment is to determine if you
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have an appropriate asset allo-
cation. This means choosing a
blend of stocks, bonds, cash in-
vestments and other options
such as commodities or real es-
tate. A variety of investments
helps lessen risk because differ-
ent assets generally don’t move
up or down at the same time.
The next step is to look within
those asset classes to determine
if you’re properly diversified.
This investing approach en-
ables investors to adjust the
risk in their portfolio by includ-
ing a mix of a certain type of in-
vestment, say, large and small
company stocks, as well as
stocks from foreign and domes-
tic companies.
Ultimately, the more time
you have, the more risk you can
take. This means you can have
more money in stocks because
they’re more volatile. The closer
you get to retirement, the more
you’ll want to shelter from mar-
ket downturns by putting it in
bonds or cash investments.
After reviewing these con-
cerns, you may find you need to
rebalance your portfolio. Reba-
lancing is adjusting how much
money you’re putting into each
asset classes to fall in line with
your original targets.
It’s necessary because over
time stocks may grow faster
than bonds. If you initially de-
cided how much risk you were
willing to take and chose to
make 60 percent of your invest-
ments in stocks and 40 percent
in bonds, you may end up with a
70/30 or 80/20 mix. This means
you’re taking on too much risk.
These ideas put together
make up fundamentals of long-
term investing. They helped
millions of 401(k) investors
from losing their shirts in this
recession.
“Even in the worst market
economy since the Great De-
pression, people have seen their
balances move back up today to
where they were before the
market crashed in mid-2007,”
said Dean Kohmann, vice presi-
dent of 401(k) plan services at
Charles Schwab & Co. Inc.
The easiest way for most peo-
ple who don’t have time to
spend analyzing the market to
weigh all these issues is to get
into a target date fund. It’s a
mutual fund that automatically
adjusts the mix of stocks, bonds
and other investments as you
near retirement.
Though the market contin-
ues to move upward at a fairly
steady clip, you should resist
making retirement investment
decisions on the odds of a mar-
ket correction, said Alan
Skrainka, the chief market
strategist for Edward Jones,
one of the nation’s largest finan-
cial services companies.
“Nobody knows what’s going
to happen in 2010. Since you
can’t predict, you must pre-
pare,” he said.
That means sticking to three
key principles: hold quality in-
vestments, diversify broadly
and hang on for the long term.
Some experts are confident
the stock market will continue
to gain value this year. Factors
include higher trading volume
driven by sidelined investors
getting back in, economic activ-
ity growing and corporate prof-
its coming in above expecta-
tions, said Art Hogan, chief
market strategist for Jefferies
Asset Management.
“This is going to be the first Investing strrategies
quarter in nine quarters we’re Thinking about your 401((k) this year may mean preparing for Alan Skrainka, chief market strategist, Edward Jones:
going to see positive year-over-
year earnings growth,” he said.
a market downturn, perhaaps inflation. The best strategy is to
have the appropriate mix of stocks, bonds and cash and to
There are three important things to remember when investing
for retirement:
In addition, companies are like-
ly to offer clearer guidance,
periodically rebalance yoour investments. You might also want Hold quality investments.
which will likely be a positive to consider the advice of these experts who say adding Diversify broadly.
influence on the market, he commodities or real estatte can help diversify and hedge Hold for the long term.
said. against inflation.
One cautionary note is that Dean Kohmann, vice president of 401(k) plan services
inflation is a possibility for this Art Hogan, chief market strategist, Jefferies Asset at Charles Schwab & Co. Inc.:
year, and you should consider
commodities as a hedge against
Management: Consider a target date fund because it
it. Hogan recommends looking Protect against inflationn by considering a commodity automatically rebalance your portfolio based on
into a commodity exchange equity exchange traded fuund. how close you are to retirement.
traded fund. What’s more, in- Look at mutual funds w with companies in the industrial, Consider rebalancing your account
dustrials, materials and energy materials and energy secttors because they, too, will do well quarterly rather than once a year if you’re
stocks also do well in inflation-
during inflation. Examplees include metals, agriculture and concerned about volatility.
ary periods, and selecting funds
with some of these types of com- energy companies.
panies should be considered, he
said.
Also be aware that a common
mistake investors make after a
period of high volatility is being
too conservative by keeping
money in Treasurys or certifi-
cates of deposit, said Jerry Mic-
colis, a senior financial adviser
with Madison, N.J.-based Brin-
ton Eaton Wealth Advisors.
These are safe places to put
money, but the return is very
low. The average rate of return
on a 1-year CD is about 1.6 per-
cent, for example.
Miccolis also cautions
against being too risky by plow-
ing too much into stocks, bet-
ting they’ll continue to go up.
That’s a surefire recipe for di-
saster and a lesson many people
learned over the past two years.
As the past few years have
proved, reacting to short-term
market downfalls and upsw-
ings can be more damaging
than sticking to a long-term in-
vestment strategy. That may in-
clude some minor adjustments
for inflation and other trends,
but shouldn’t stray from the ba-
sics of diversification and reba-
lancing.
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