Portfolio Strategies for a Shaky Market
As retirement nears, avoiding major losses is essential
So how can older boomers like Hoffmann, with retirement on the horizon and the stock market looking shaky, avoid a similar fate?
Mike Scarborough, president of the Scarborough Group, a 401(k) advisory firm that helps workers with their retirement accounts, says his company is fielding calls from clients asking just that. "They're not jumping off the cliff," he says, "but within three sentences, they're mentioning the 2000-2002 time period. They don't want to revisit it."
While it's dangerous and foolhardy to make wholesale changes to your investment plan simply because of market jitters, here are ways to reduce the chances of major losses early in your retirement:
Don't hold individual stocks. It's not the individual stocks and bonds you own, research shows, but your mix of stocks and bonds that determines long-term investment success. So why take the risk of owning individual securities when you can invest in an array of diversified mutual funds or exchange-traded funds, which are baskets of stocks that trade the way a single security does?
That's what Steve Rozich, 62, of Laguna Niguel, Calif., recently asked himself. A few weeks ago, Rozich pruned his portfolio of individual stocks, including blue-chip shares like Walt Disney and Hilton Hotels. He replaced them with a cross section of mutual funds that invest in various types of equities to maintain his overall exposure to stocks. "I'm completely out of individual equities now," says Rozich, who runs a small business that helps companies with their employee rewards programs. "I can sleep better at night," he says. "I don't have to get up every morning and check where those prices are."
Rozich understands that in any given year, individual stocks can easily outpace the market. In fact, both Hilton and Disney shares nearly tripled the returns of the Standard & Poor's 500 in 2006. But any stock can lag behind, too. Plus, holding baskets of stocks is less risky, says Phillip Cook, a financial planner in Torrance, Calif.
Indeed, the worst three-month loss for an investment in an S&P 500 index fund—a collection of 500 stocks—was a 17 percent drop in the summer of 2002. Yet in the past month, shares of several mortgage companies have lost way more than that in a single day.
Rebalance routinely. It may sound simple, but rebalancing your portfolio periodically—resetting your mix of stocks and bonds—can help cut your risk without upsetting your long-term strategy.
Let's say you decide that the best mix of assets for you is 60 percent stocks, 30 percent bonds, and 10 percent cash. Over time, that mix will change on its own, as stocks, bonds, and cash appreciate at different rates. Because stocks have historically outpaced bonds (a 10.4 percent yearly return on average versus 5.9 percent), your portfolio's weighting in stocks will almost surely grow over the long term, says Christine Fahlund, senior financial planner with T. Rowe Price.
Assume you started off with the 60-30-10 mix of stocks, bonds, and cash on Dec. 31, 1984. And let's say you never rebalanced your account. By March 2000, your 60 percent in stocks would have soared to 86 percent.
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