Sunday, January 24, 2010

Remember basics as your 401(k) rebounds

Investing tips for 2010
David Pitt Associated Press Jan. 23, 2010 12:00 AM

Millions of 401(k) accounts have made up lost ground over the past 10 months. Helped by a stock-market surge and continued contributions, the question now is how to keep from backsliding when market momentum slows or reverses.
With the market up significantly since it hit its low in March, the rapid rise in stock prices has many believing that a sharp downturn is likely. The last thing investors can stomach is the market reversing itself and snatching more of their retirement money.
What to do now?
Experts recommend revisiting the basic principles of investing.
A starting point for those who are heavily reliant on their 401(k) is to make sure their portfolio reflects their appetite for risk. That should be centered on how much longer you must work to meet your retirement savings goal and how comfortable you are with losing some money.
A key focus in making this assessment is to determine if you have an appropriate asset allocation. This means choosing a blend of stocks, bonds, cash investments and other options such as commodities or real estate. A variety of investments helps lessen risk because different assets generally don't move up or down at the same time.
The next step is to look within those asset classes to determine if you're properly diversified. This investing approach enables investors to adjust the risk in their portfolio by including a mix of a certain type of investment, say, large- and small-company stocks, as well as stocks from foreign and domestic companies.
Ultimately, the more time you have, the more risk you can take. This means that you can have more money in stocks because they're more volatile. The closer you get to retirement, the more you'll want to shelter from market downturns by putting it in bonds or cash investments.
After reviewing these concerns, you may find you need to rebalance your portfolio. Rebalancing is adjusting how much money you're putting into each asset classes to fall in line with your original targets. Over time stocks may grow faster than bonds. If you initially decided how much risk you were willing to take and chose to make 60 percent of your investments in stocks and 40 percent in bonds, you may end up with a 70/30 or 80/20 mix. These ideas put together are the fundamentals of long-term investing. They helped millions from losing their shirts in this recession.
"Even in the worst market economy since the Great Depression, people have seen their balances move back up today to where they were before the market crashed in mid-2007," said Dean Kohmann, vice president of 401(k) plan services at Charles Schwab & Co. Inc.
The easiest way for most people who don't have time to spend analyzing the market to weigh all of these issues is to get into a target-date fund. It's a fund that automatically adjusts your investment mix as you near retirement.
"Nobody knows what's going to happen in 2010," said Alan Skrainka, the chief market strategist for Edward Jones. "Since you can't predict, you must prepare."

More on this topic
401(k) tips
Art Hogan, chief market strategist, Jefferies Asset Management
• Protect against inflation by considering a commodity equity exchange-traded fund. • Look at mutual funds with companies in the industrial, materials and energy sectors because they, too, will do well during inflation. Examples include metals, agriculture and energy companies.
Dean Kohmann, vice president of 401(k) plan services at Charles Schwab & Co. Inc.
• Consider a target-date fund because it automatically rebalances your portfolio based on how close you are to retirement.
• Consider rebalancing your account quarterly rather than once a year if you're concerned about volatility.

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