Strategizing a retirement rebound
Strategizing a retirement rebound
So you've lost a lot of your savings. You're not alone. Now you need to pick an asset allocation strategy that will help you recoup those losses.
By Walter Updegrave, Money Magazine senior editor
April 21, 2009: 6:00 AM ET
NEW YORK Money -- Question: I plan to retire in about two years, but I've lost a lot in my retirement savings account. Currently my money is spread out over small and midcap stocks, growth shares and safe investments. But I'm thinking of moving my balance to an account that tracks the Standard & Poor's 500 index, riding the upswing until the S&P hits 1,100 or 1,200 and then diversifying into something safer. Do you think this is a good plan? --Alan W., Raleigh, North Carolina
Answer: I find that many of the people whose 401(k)s and other retirement accounts got hammered by the stock market's meltdown fall into one of two camps.
The first (and I suspect largest) is what I call the "foxhole" camp. These are the people who, having watched their balances dwindle and fearing even deeper losses, have moved or are contemplating moving their money to investment options that will staunch the bleeding: bonds, stable-value funds, money-market funds, CDs and the like. They plan to hunker down in these secure investments until conditions improve. At that point, they'll consider investing in equities again.
The second group is what I think of as the "Hail Mary" camp. These are the people who, sitting on losses of 20% or more, reckon the best and fastest way to recoup those losses is to throw the investing equivalent of a "Hail Mary" pass into the end zone. They think that by loading up on stocks, they'll catch the market's rebound and get back to even. Assuming that happens, these investors figure they can then return to a more prudent game plan. You are obviously thinking about joining this camp.
I am not an advocate of either of these camps. The problem with entering the first one is that it's hard to know when to leave. Every time stocks make a decent move, you have to wonder whether the rally has legs or it's a bear market trap. Then you've got to ask yourself, as The Clash so famously did in its 1982 album Combat Rock, should I stay or should I go?
Leave too late and you miss the usually explosive early gains of a new bull market. Leave too soon and you get burned, which probably sends you back into the foxhole until you go through the same process again, only this time second-guessing yourself even more.
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