Wow, the markets sure have been ugly lately.
So ugly, in fact, that many advisors have been telling 401(k) investors to just walk away for awhile. Stop watching the news, don't check your balance, find something else to focus on for a bit.
I happen to think that's great advice for many people -- but if you're nearing retirement, or in retirement, it's not realistic. I mean, it's easy for someone who is 25 years from retirement just to ignore the current gyrations, but if you're going to actually need that money? Or you already do?
It's hard not to look. And what you see when you look probably isn't pretty. In fact, you probably feel angry, and fearful, and powerless to do anything about it.
But there are a few things you can do to minimize the damage, and maybe even come out a bit ahead.
So what have you got?
First, let's take a look at what's actually in your portfolio. If you're already retired, or within a few years of retirement, you've probably got a mix of asset types -- some stocks and some bonds and perhaps some cash holdings.
That's a good thing. We can work with this. Let's start by remembering why you diversified in the first place:
- Money market funds are the best place for short-term money -- money you'll need within the next year or so. They provide stability, low risk (yes, even now -- more on that in a bit), and a yield that's usually better than what you'd get in an ordinary bank account. Alternatively, you may have short-term CDs instead, which offer (usually) slightly more stability with (usually) slightly less yield.
- Bonds and bond funds are for intermediate-term money -- not the money that you'll use in the next several months, but the money you'll need one to five years out, roughly. Risk and return vary depending on the types of bonds you've selected, but assuming you've stuck with basic high-quality issues, you're getting a bit more return for a bit more risk than you would with a money market fund.
- Stocks are your long-haul growth engine. They fluctuate a lot, but over an extended period, they provide the best returns of any mainstream investment.
Your to-do list
While you and I can't magically reverse the markets all by ourselves (unless your last name is Buffett), we can work around it to some extent. Here are some things to contemplate as you try to make the best of the current situation:
- Cash out your non-stock assets first. While it's best to keep 5 years of cash needs in a "comfy cushion" of fixed-income investments, there are times when it's OK to draw down that money and have a greater portion of stocks in your portfolio. This is one of those times. The point of that cushion is to keep you from having to sell more stock than necessary during bearish periods. Yes, decreasing the ratio of bonds to stock will technically increase the "overall risk" of your portfolio. Yes, investment advisors who look only at risk models and not at real-life market cycles and needs might tell you it's a bad idea. But here's the rebuttal: Bear markets end. This one will too. If you can wait until an upward swing to sell stock, why shouldn't you?
- Don't spend more than one minute worrying about your money market fund. By now you've heard that the Wall Street Pox spread to a couple of money market funds last week. That sounds scary. But consider two points: First, the investors in those funds will get most of their money back. Second, the Feds are now moving to stand behind money market funds in an effort to stop this from happening again. It has only happened twice in the history of money market funds, and most investors got most of their money back. Still worried? Your minute is up -- read this for alternatives.
Consider retooling your stock portfolio. It's important to own stocks throughout your life -- but the kinds of stocks one owns should change over time. While younger folks may be more oriented toward aggressive growth stocks like Volcom
(NASDAQ:VLCM)or LoopNet (NASDAQ:LOOP), those in or near retirement should be looking at a larger allocation of blue chips, ideally with dividends -- General Electric (NYSE:GE), Johnson & Johnson (NYSE:JNJ), maybe ExxonMobil (NYSE:XOM)depending on where you see oil prices going. That doesn't mean you can't take a flyer on a promising story like Tessera Technologies (NASDAQ:TSRA)from time to time, but stocks like Kraft Foods (NYSE:KFT)are more likely to hold value through rough waters -- and those dividends can add significantly to your total retirement income picture.
Last but not least, don't try to do all this alone if you're not sure you're up to it. Consider working with a fee-based investment advisor -- or at least giving the Fool's Rule Your Retirement service a try. The archives are full of articles that go into all of this stuff in much more detail, and there's a friendly members-only message board -- staffed by professional retirement experts -- to help you work through the specifics of your own situation. Best of all, it's much cheaper than hiring an advisor -- and you can try it completely free for 30 days, with no obligation.