If you're like most retirement savers, evidence that the stock market downturn has gotten personal is written all over your latest 401(k) statements.
The worst thing you can do now is move funds around in a panic, say the experts. But that doesn't mean you should do nothing.
"The traditional wisdom is to select your portfolio and leave it alone," said Scott Coopersmith of Diversified Investment Advisors, a Purchase, N.Y., firm that sets up 401(k) plans for employers. However, he said, investors shouldn't just say, "I'm going to leave my portfolio alone and hope it works out in the end."
That's because 401(k)s - and some similar tax-deferred retirement plans available to government and nonprofit workers - allow employees to divide their contributions among different funds, each of which is likely to be affected somewhat differently by the stock market's ups and downs - including the volatility that ensued amid an economic slowdown and after the Sept. 11 terrorist attacks. If you don't make adjustments, you may end up with lesser gains.
Say, for example, that you set up a plan in 1998 to put 70 percent of your savings in stocks and 30 percent in bonds, said R. Douglas Wilson, a retirement adviser at the Scarborough Group in Annapolis, which manages 401(k) accounts for workers. The 1999 stock market rally would have pushed up the value of your equities, perhaps leaving you with 80 percent of your portfolio's value in stocks and 20 percent in bonds.
If you then transferred some of the money from your 401(k) stock funds into the plan's bond funds to reset the 70-30 split, you would have had a portfolio with the same overall value - and one that was poised for the year 2000, when bonds outperformed stocks.
"What you're always doing" when you reallocate, Wilson said, "is selling high and buying low."
Reallocating should be done on a regular schedule, say two times a year - not in a panic as the market rises or falls daily, experts say. And it may seem counterintuitive to some investors, who head for the nearest sale rack when they want a bargain on clothes but are more likely to be comfortable buying stocks when they are flying high.
"To tell someone you're going to take money out of an account that made the most last year and put it into one that made the least" isn't always popular, said MaryBeth Miller, a certified financial planner for American Express Financial Advisors in Towson. "People tend to micromanage these accounts if they are looking at [them] at all."
Taking a look at the allocation of your portfolio may be especially important now, when many 401(k) accounts have taken it on the chin. The total value of assets in 401(k)s declined last year for the first time in their 20-year history, falling by $72 billion, according to a report by Boston-based Cerulli Associates Inc. The market downturn pushed the average participant balance to $41,919 by the end of last year from $46,740 at the end of 1999.
To be sure, you're already doing better than many if you are making regular contributions to your 401(k), or to a similar plan that allows you to make before-tax contributions from each paycheck for retirement. The 403(b) plans largely used by nonprofit employees and schoolteachers, as well as the 457 plans used by local government employees, are examples.
But to get the most out of those contributions, financial advisers make these recommendations:
Make an investment plan. "Most people spend more time planning vacations than their retirement options," Miller said.
American Express and other firms base the plans on factors such as the number of years before retirement, the standard of living you'd like to maintain and how comfortable you are with risk.
For example, a series of Scarborough Group model portfolios suggests that a 25-year-old who understands market volatility put 100 percent of her 401(k) contributions into stocks, with 20 percent going into international equities and 35 percent in large-company stocks. But a 40-year-old with children may choose to put 70 percent into stocks and 30 percent into securities with fixed returns, such as government or corporate bonds.
A 60-year-old investor may reverse that split, putting 70 percent into cash and bonds and 30 percent in stocks.
Review your assets on a regular schedule, reallocating when necessary.
"Within a single tax-deferred umbrella - a 401(k) or an IRA - there is generally no [tax] penalty for making these moves," Coopersmith pointed out. But moving money from one umbrella to another - say, from a 401(k) to a Roth IRA - sometimes can result in penalties. Check with an accountant first to make sure.
If your review reveals losses, Coopersmith warned against "trying to play catch-up" by moving, say, all money into an aggressive fund. Instead, adjust your plan with major events in your life - such as the birth of children.
Don't borrow from your plan if you can avoid it.
Limit exposure to your own company's stock. Investors should keep in mind that, already, "your health care, your paycheck and pension comes from the company," Wilson said. Why have your 401(k) investments tied up in it, too?