Bear market makes boomers wary as retirement draws near

July 13, 2008|By Gail MarksJarvis | Gail MarksJarvis,Your Money

Baby boomers are afraid of the bear market.

Raised on Wall Street's buy-and-hold primer that's been spoon-fed to the first generation of 401(k) investors, many boomers gritted their teeth and stayed with the market through the 2000 to 2002 bear.

Now, however, retirement is only 10 years away - or less - for many boomers, and they are wondering if it is foolish to stay the course.

The stock market has recently touched bear market territory again - a drop of about 20 percent since October 2007. With that decline, boomers wonder if they missed an important lesson in the primer.

"Every time I look at my 401(k), I see less money," said a 55-year-old lawyer. "I have always been diversified, and dollar cost average. But am I missing something, given my plan to retire in 10 years?" The question has become so common recently, I took it to numerous pros.

Unfortunately, the pros are financial planners and investment managers, not soothsayers. In essence, they said: If we knew we were going into a multiyear bear market, a person would be wise to run. But with the market down 20 percent, and the average bear market drop about 27 percent, this one might be over within a few months. If that's true, and a rally occurs, an investor who has moved money out of the stock market won't receive the healing power of the rally.

Bear markets tend to end unexpectedly.

Yet James Bianco, of Bianco Research, sees no reason in the short term why the bear market should end soon. The market is down, he said, because there is no relief visible in the housing crisis or the financial crisis. And the economy can't expand if consumers and businesses can't borrow the money they need to make purchases. On top of that, he sees no relief from oil prices.

He will know the bear market is ending, he said, when he sees both crises ease, and when investors are so eager to buy financial and consumer stocks that they become the market leaders - in other words, the prices will be rising more than energy stocks, the current leaders.

Following all of that is difficult, and even the smartest brains on Wall Street read the early signs wrong. So financial planners don't try. Instead, they advise people to realize what can happen during a bear market and respond if they must.

First, they say, make sure that if you are retiring in 10 to 15 years and nervous about losing money that you don't have more than 65 percent of your portfolio invested in the stock market. Christopher Jones, the chief investment officer for Financial Engines, a firm that advises people on investing 401(k) funds, suggests this mixture of mutual funds: 33 percent in large caps, or the stocks of large companies, 12 percent in small and mid-caps (or small and medium-size companies) and 20 percent in a fund or funds that invest in foreign stocks. The remaining 35 percent would be in bond funds and money market funds.

That mixture has been run through computers containing data on all the bear markets and strong markets, and Jones said investors can see how risks have turned out under bad times and good times through computer simulations.

A person who invests $10,000 over a five-year period in a portfolio that's invested 65 percent in stock funds and 35 percent in bond funds runs the risk - according to computer simulations - of ending up with $7,960 in a bad market period. But the average would be more like $12,700, and in good periods $19,000. Over a 10-year period, the results could be as bad as $8,300, but as good as $28,400. The average would be $16,300.

Of course none of these are promises. For more details on risks in portfolios, read Jones' book, The Intelligent Portfolio: Practical Wisdom on Personal Investing from Financial Engines. Still, looking at history sometimes isn't comforting when you are living through a bear market.

Sue Stevens, a Chicago financial planner, has her clients decide what losses they are willing to bear. Looking at it in percent terms can be misleading. It's devoid of the emotional pull. So Stevens has her clients look at what a 25 percent loss in a single mutual fund would do to their overall portfolio. If they don't think they could live with it, she has them sell a portion when that level of loss occurs.

Many financial planners, however, insist that selling after a 25 percent loss is a mistake.

But Stevens isn't advocating selling everything and running away in a panic. The investor sells a portion - maybe 5 percent to 10 percent of their stock funds - so they feel more comfortable and avoid the panicky exit from the stock market that will leave people unable to recover.

For an investor squeamish about losses now, Stevens suggests moving perhaps 10 percent of their money out of stock funds and into a Treasury Inflation Protected bond fund.

gmarksjarvis@tribune.com

Gail MarksJarvis writes for Your Money.

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