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After The Dust Has Settled

Back to Basics: If Your 401(k) Needs a Make-Over, the Fix May Be Easier Than You Think


Early last year, marketing executive Jennifer Root got tired of hearing her co-workers crow about the double-digit returns they were earning in their workplace retirement plan. So Root, 35, began funneling all of her contributions to the plan's large-company stock funds, which had been posting yearly returns of 20% or more.

Root made the change in January 2000--just in time to watch the funds plunge in value as the stock market began to unravel.

As her losses mount, Root now feels she needs to take less risk with her retirement savings. But she's also fearful of making any changes to her portfolio.

"I don't want to make another move and mess things up again," she said.

Amid the worst stock market decline in more than a decade, Root's dilemma is shared by millions of American workers with defined-contribution retirement plans such as 401(k)s and 403(b)s.

It's the first time many Americans have confronted month after month of losses in their retirement plans, and they're wondering what to do now, financial experts say.

"People are asking, 'Where's the market going?' and 'Should I be making any changes?' and 'What are other people doing?' " said Peter Smail, president of Fidelity Investments' Fidelity Employer Services Co., which handles 19% of all 401(k) assets in the United States.

The answer, financial planners say, may be to do nothing, or it may be to do a lot. It all depends on your goals, how long you have until retirement and how far you let your investment portfolio get off track.

Although losses are painful, they're an inevitable part of investing in stocks. Because stocks have provided the best returns over time--after all, investing in stocks is simply investing in the economy, which usually is growing--most investors should keep a large chunk of their retirement savings in the market, experts say.

It's true that the stock market has always rebounded, even though it has sometimes taken a decade or more to recover lost ground.

"If you're young and your 401(k) is aggressively invested, that's how it should be," said Irvine financial planner Victoria Collins, noting that investors in their 20s and 30s have plenty of time to ride out market swings.

Standing pat can be a problem, however, when a portfolio has drifted from your intended asset allocation--that is, the mix of investments that best fits your goals, risk tolerance and time horizon.

Long-term goals generally call for riskier, usually higher-return investments such as stocks, whereas short-term goals demand a more conservative approach.

During the go-go '90s, some investors allowed their 401(k) portfolios to get dangerously out of balance as they poured money into tech-stock-heavy funds and other risky offerings while ignoring more conservative investments, such as bonds. These investors may find they need to move big chunks of their money around--as painful and as scary as that may seem.

"They've got to try to take their emotions out of it as much as possible," said Robert Wacker, a San Luis Obispo financial planner. "What's past is past. What you have to do now is structure your portfolio in a way that makes sense" for the future.

If you aren't sure how best to divide your portfolio, look first to your retirement plan investment provider. Many firms offer generic asset-allocation recommendations.

There also are resources on the Internet that can help, including Intuit's free 401(k) advisory service at

Asset allocation might be less daunting if you remember that there are just three basic portfolio building blocks--stocks, bonds and cash (short-term money market securities). Within the stock category, you'll have to choose among large-company stocks, smaller stocks and foreign stocks.

It's then a question of getting the right mix.

As many investors have learned over the last year, bonds and cash pay interest and provide a cushion in a portfolio. They grow more slowly than stocks, but they also don't suffer the kinds of declines that stocks can.

A typical investor in her 20s or 30s, then, might want to have 20% of her 401(k) money in bonds and the rest in stocks, whereas someone in his 40s or 50s might want 40% in a mix of bonds and cash, according to mutual fund company T. Rowe Price.

Aggressive investors in those same age brackets might choose to have less in bonds and cash, whereas conservative investors might choose to have more.

How can you tell whether you're conservative, moderate or aggressive as an investor? There are plenty of quizzes available on the Internet and in companies' human resources departments. But financial advisors say most people can determine their risk tolerance simply by monitoring how they feel about their recent losses.

The more despairing you might feel, the more conservative you probably are--and so, perhaps, should be in your investment choices.

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