401(k) Steps to Take Now

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It seems as if I start every article the same way these days: Another day, another batch of wild developments in the market.

I'm still catching up with Tuesday's action as I write this -- I spent a good part of the day at the dentist, half-watching CNBC out of the corner of my eye -- but it does appear that some progress was made toward unsticking the commercial paper market, thanks to yet another "unprecedented" move by the Federal Reserve.

Meanwhile, several European governments are contemplating action to support the latest maybe-troubled banks, including Royal Bank of Scotland (NYSE: RBS  ) and Barclays (NYSE: BCS  ) . Australia's central bank cut interest rates. Exchange specialist CME Group (Nasdaq: CME  ) and Citadel Investment Group are teaming up to create a trading platform for credit default swaps, which will hopefully bring some much-needed transparency to that market. In all, regulators and key actors throughout the world are taking hopefully constructive steps, now that the problems are better understood.

With luck -- and further interventions, here and abroad -- maybe we'll be able to settle down and have a fairly conventional global recession. That would be bad, of course, but it wouldn't be stock-up-on-ammo-and-canned-ravioli bad, which -- my secret fondness for Chef Boyardee notwithstanding -- is definitely progress.

Meanwhile, our retirement portfolios have taken a hard hit, and there may still be more to come. What should we be doing?

Can you stand to look?
If you can't deal with thinking about your retirement account balances yet, I totally understand. In fact, if you're more than 10 years or so from retirement, there's no need to look until things settle down. Turning off the TV news and going for a walk instead continues to be a fine idea. We've come through a heck of a storm already, and even though the storm might rage for a while longer yet, a damage assessment and repairs can wait until the winds die down.

When you do look, you'll probably see some scary-looking losses, and you'll probably start thinking about how to reduce further losses and how to prepare for more storms going forward.

This is all good, as long as you remember rule No. 1:

Don't panic.

Panic leads to bad decisions -- decisions made out of fear, often in haste. If you're inclined to make a change to your portfolio, think about it for a day or two. In the grand scheme of things, in the context of a decade or three of being invested before you retire, a few days will make no difference.

Rule No. 2 is: Remember that you can only do so much. If you're looking at your 401(k), your universe of investments is probably pretty small -- a few dozen mutual funds, most likely. Your options are limited, but you do have options. And as Fool retirement guru Robert Brokamp pointed out in a recent update for Rule Your Retirement members, many factors affecting your portfolio (the Fed, housing prices, other investors' panic) are beyond your control -- focus on what you can change.

Roll up your sleeves
If you want to make some changes to your portfolio, here's some food for thought:

Diversify. Roger Gibson, an asset-allocation expert interviewed in Rule Your Retirement not long ago, hammers home this point: Spreading your portfolio across multiple asset classes, all of which behave differently at different times, reduces volatility and increases returns over time. A fund such as Stratton Small Cap Value (STSCX), which holds stocks including ON Semiconductor (Nasdaq: ONNN  ) , Energen (NYSE: EGN  ) , and Amedisys (Nasdaq: AMED  ) , is arguably a great investment right now, but it shouldn't be your only investment. Far from it. Check out Rule Your Retirement's model portfolios for a look at a great diversification roadmap (it's a paid service, but grab a free trial for 30 days of access), and don't be afraid to dial down emerging-markets exposure and add some bond investments if you want to reduce risk even further. Speaking of which ...

Remember our old friend, the bond. It's true that study after study has shown that stocks outperform bonds over the long haul. But high-quality bonds give you income to reinvest -- and thus growth -- no matter what the market is doing. And unlike the dividends on blue chips, such as the one on my Bank of America (NYSE: BAC  ) stock, a bond's income stream won't get cut when times get tough. You shouldn't be entirely in bonds, but some bond exposure will help smooth the ride now and in the future. Bond index funds are the best way to go here, if your plan has them.

No matter what, keep investing. I recently overheard a very smart acquaintance saying that this was a terrible time to be investing in her 401(k). She's very smart, but she was also wrong: Your contributions buy more shares now than they did six months ago. Adjust your investment mix if you feel the need, but keep adding new money -- 20 years from now, you'll regret it if you don't.

And last but not least, stay informed. I've mentioned the Fool's Rule Your Retirement service already, and I think it's the most cost-effective source of expert advice specific to retirement investing out there. From specific investment recommendations to expert interviews to timely updates to a message board filled with thoughtful advice, it's a complete source of guidance for retirement investors in these difficult times. Complete access for 30 days is free of charge -- with absolutely no obligation to subscribe.

Fool contributor John Rosevear owns shares of Bank of America and thinks the dividend cut was probably a smart move. He also owns shares of Stratton Small Cap Value Fund but has no position in the other companies mentioned. Bank of America is a Motley Fool Income Investor recommendation. Stratton Small Cap Value is a Motley Fool Champion Funds pick. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (10) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 08, 2008, at 11:38 AM, barleyguy wrote:

    Which was more painful, the dentist or watching the stock market?

  • Report this Comment On October 08, 2008, at 1:26 PM, TMFMarlowe wrote:

    The dentist. I was already pretty numb about the stock market, but Novocain has its limits.


  • Report this Comment On October 08, 2008, at 8:46 PM, nk777 wrote:

    You mention the long-term dollar-cost-averaging for a 401K plan, but what about rollover 401Ks where one is no longer allowed to add money? What to do with the decreasing portfolio of the rollover 401Ks?

  • Report this Comment On October 09, 2008, at 6:58 AM, TMFMarlowe wrote:

    nk777, it's best to think of your IRAs and 401k as one single portfolio, held in different accounts. If you have a 401k or IRA to which you are making regular contributions, allocate your entire portfolio (the IRA(s) and the 401k) the way you want it and proceed accordingly. If you aren't making contributions right now, consider that it's arguably too late to sell stocks -- I don't know where the bottom is, but I'm pretty sure we're well more than halfway to it -- and that just gritting teeth and holding on to long-term positions might be the best approach right now.


  • Report this Comment On October 10, 2008, at 10:58 AM, lntwo wrote:

    Down 40% and I didn't even get a hottub full of strippers out of the deal. Sheesh.

    Still buyin' and holding long.

  • Report this Comment On October 10, 2008, at 12:23 PM, obryan2579 wrote:

    -40%. Not feeling to great. Upped my 401k contribution

  • Report this Comment On October 10, 2008, at 12:41 PM, pythagoras99 wrote:

    I have at least 15 years to retirement. My 401k has about 30% in bond funds and cash. I'm going to give it maybe another week, and then redistribute that 30% into stock funds. You can call it a "panic" or a "crash" or a "crisis" if you like... I call it a "clearance sale."

  • Report this Comment On October 10, 2008, at 2:48 PM, michlav1 wrote:

    Well, what about if you can no longer afford to keep DCAing. When do you sell to keep your current money? I've been not panicking, and I'm not panicking now, but when does it make sense to sell it and wait for it to go down further and then rebuy the stocks? If I had sold on Monday I could have saved myself thousands of dollars. I don't think it's going to get better anytime soon because more companies are going to go out of business. So even if I just wait until next Friday to buy it all back after selling today I may be able to save 10%.

    I wish I had money to buy more stocks, but I changed my job and took a pay cut.

  • Report this Comment On October 10, 2008, at 6:39 PM, ttropics wrote:

    Too late to panic. Down 52%. It'll just be that much longer to retirement.

  • Report this Comment On October 12, 2008, at 6:52 PM, anuvaka wrote:

    It pays to watch the Market. I record all dollars and shares once a month.

    In March I moved a lot of dollars to Bond Funds. I did it again in Sept. My total losses are about 21% YTD. The decline started in Nov, so I was very late, but I suffered less than some. Soon I will be moving, slowly, back to stock funds. I did the same in 2000-2001 and doubled my holding in about 2 years.

    No, I am not a Smart Investor, I just watch. I re-balance infrequently but try to keep a decent diversification.

    Right now I have funded and transferred to a new Roth to see a >30% loss. Which I believe will recover. Someday.

    Everyone should own a bond fund. I have a dozen years to retire and don't wish to lose hard earned capitol.


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