As countless investors have learned in the past decade, it's really frustrating when you do everything you're supposed to do and you still end up losing a good chunk of your retirement savings. Unfortunately, patient long-term investors haven't been spared from the market's capricious whims, either.

In the hole
A recent joint report from the Employee Benefit Research Institute and the Investment Company Institute revealed that the average long-term 401(k) account balance fell 24% last year -- and that even includes the money that employees and employers put into their accounts! The study looked at accounts held consistently since 2003 to get an idea of how longer-term investors were faring. The news is even worse when newer accounts are added into the mix -- newer accounts bring the average 401(k) loss in 2008 up to 30.5%.

This report confirms the dreadful truth that investors themselves have learned -- folks who followed a steady, long-term commitment to their retirement plans still got the shaft. These investors weren't trying to time the market, chase hot recent performance, or invest in speculative areas of the market. It's truly depressing when a portfolio loses nearly a quarter of its value, even after you make your hard-earned annual contributions!

Glimmers of light
Despite this bad news, the report did have a few bright points. First of all, investors are getting smarter about diversification. Allocations to company stock are down to an average of 9.7% of portfolio assets. That's still a bit high for most investors, but at least the trend is in the right direction. The average 401(k) investor also continues to invest the majority of his or her portfolio in stocks -- roughly 56% of total assets. That's good, since even those folks who are closing in on retirement need a hefty slug of stocks to give their portfolio long-term growing power.

The study also noted that more and more 401(k) investors were using target-date retirement funds. These all-in-one funds invest in a variety of stocks and bonds and gradually adjust from a more aggressive asset allocation to a more conservative allocation as the investor's retirement date approaches. For example, the Fidelity Freedom series of target-date funds invests in around 20 underlying Fidelity stock and bond funds like Fidelity Equity-Income (FEQIX), Fidelity Small Cap Growth (FCPGX), and Fidelity Overseas (FOSFX). This offers instant portfolio diversification:

  • The Equity-Income fund buys large-cap names like Wells Fargo (NYSE:WFC), AT&T (NYSE:T), and ExxonMobil (NYSE:XOM).
  • Small Cap Growth focuses on smaller stocks like j2 Global Communications (NASDAQ:JCOM) and Alaska Air Group (NYSE:ALK).
  • The overseas fund fishes in foreign waters for names like China United Telecommunications (NYSE:CHU) and HSBC Holdings (NYSE:HBC).

Hopefully, investors are turning more to target-date funds like these because many of them realize the importance of a sound long-term asset allocation plan and want a little assistance from the pros.

Back on track
But after a year like 2008, many long-term buy-and-hold investors are probably wondering why they should bother. Why invest when you play by all the rules and still get burned? Well, it hasn't been pretty out there in recent years, but you're not going to be able to live out your golden years in relative comfort if you don't take on the risks of the stock market along the way.

The most important thing for 401(k) investors to remember is that we're coming off of a particularly bleak period of market performance. Having endured such a rough spell of performance actually makes it more likely that the next few years are going to be exceptionally profitable ones. Keeping your focus on the long-term picture is vital. In fact, the same study showed that in spite of that 24% drop in 2008, the average 401(k) account actually increased by an annualized 7.2% from 2003 to 2008. That's what the long term does -- it smoothes out those losses and makes them more palatable.

Fortunately, it looks like 401(k) investors are already getting the message about the other steps they need to take to reclaim their retirement -- diversify, stay away from trendy investments, and get help when you need it. While some investors have run screaming from stocks after the latest market rout, 401(k) money has been a bit more "sticky," as investors hang in there with their stock allocations. Odds are good that these folks will make up their lost dollars quicker than market timers who try to avoid any short-term drops.

Despite headlines to the contrary, buy-and-hold is not dead. True, it has been on life support for the past decade, but there is a pulse. The sooner the patient comes back to life, the sooner all of us can get back to rebuilding our retirement assets -- so get ready now for tomorrow's gains.