The stock market rally has notched its fourth year. But the
pain of the 2008-09 downturn is not forgotten.
And since future market slumps are inevitable, what should you
do to minimize damage to your portfolio, especially the mutual
funds in retirement accounts?
Going permanently to cash should not be one of those
If you cashed out on Feb. 28, 2009, near the market trough,
your cash would be worth little more than it was at the bottom,
according to number crunching by T. Rowe Price.
If you went to bonds at the bottom, your portfolio would have
climbed 84% by March 31, 2013.
But if you had stayed invested in, say, an S&P 500 index
fund all the way down and then back up, your losses would have
been erased and your gain off the bottom was 153%.
So if you're not using a proven strategy for individual
stocks, what should you do instead of cashing out of funds?
Fidelity Investments suggests basing your preparations on
lessons learned from the behavior of members of 401(k) plans it
runs. The suggestions are common sense you've heard before. But
they bear repeating with examples that clarify why:
Make saving a priority.
If you're young and just entering the work force, start by
socking away at least 6% of your pay. Increase that by 1
percentage point a year until you are saving 10% to 15% a year,
says Jeanne Thompson, a Fidelity vice president.
Suppose you had put $6,000 into a 401(k) and invested 4% of
your pay each year in a portfolio of 70% stocks and 30% bonds for
12 years. Someone with the same pay and identical portfolio,
saving at a 12% annual pace would now have a balance 2-1/2 times
larger than yours.
Contribute up to the match.
Your employer's matching contribution is like a pay raise.
The most common match in Fidelity plans is 50% of what you
kick in, up to 6% of your pay. "Employers do that rather than
100% up to 3% to encourage you to save," Thompson says. Take
Stay the course.
Even if your employer suspends or cuts its match during hard
times, keep making your own contributions.
You'd need to contribute a lot more later to make up for what
compounding of smaller amounts would achieve.
Choose the right strategy.
"If you don't have the skill, will or desire to choose your own
investments and then manage your portfolio, consider using a
target-date fund or managed account," Thompson said.
Target-date funds change their asset mix as you approach and
enter retirement. A manager makes investment decisions for
Plan members using managed accounts in Fidelity plans grew 57%
in 2012. Fidelity charges each member an average of 0.50% of
assets for managed account service.