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CASE 3

Affluent in midlife, with a bleeding investment portfolio

October 19, 2008

Even before the recent market turmoil, the average American nearing retirement had only $60,000 in his or her 401(k). The value of Judy and Drew's nest egg has shrunk by six times that amount since the first of the year. They still have about $1.5 million invested in mutual funds in their profit-sharing plan, brokerage account and IRAs. But losing almost $400,000 would shake anybody up -- especially if they were planning to retire in the near future.

"They have some panic," said Gagne, the financial planner. "They've asked the question, 'Should we stop the hemorrhaging and get out now?' " His answer: No. Their portfolio is well-diversified (50% equities, 10% real estate and commodities, 40% bonds), which is why their losses this year have been about a third lower than the overall stock market's. In fact, because stock losses have probably thrown their asset allocation out of balance, they should consider shifting some money from bonds to stocks (using mutual funds in their profit-sharing plan or IRAs to avoid a tax hit).

Judy and Drew might consider "harvesting" some tax losses to offset future capital gains by selling one or two loser funds in their taxable brokerage account. But they should reinvest the proceeds in similar funds to maintain the desired asset allocation. No one knows how long the current bear market will last, but history tells us that being out of stocks is no place to be when the market eventually turns around. "An investor sitting on the sideline is almost sure to miss the largest gains, which have almost always occurred in the months immediately following the drops," Gagne said.

Judy and Drew

Judy, 55, and Drew, 59, are married with two adult children and a third in college. Drew is a partner in a law firm; Judy does not work. They own a house in Hermosa Beach.

Assets

* Employer's profit-sharing plan: $850,000

* Bank savings account: $25,000

* IRAs: $80,000

* Brokerage account held in their family trust: $600,000

* House: $2 million

Debt

* Mortgage (6%, 20 years left): $160,000

Annual income

$400,000

Annual savings

* Profit sharing: $45,000

* After-tax savings: $25,000 into their brokerage account

Objectives

* Drew would like to retire in three to five years

* Protect the value of their investment portfolio

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