Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Bank Holding Company who wrote (211224)	7/19/2009 9:57:41 PM
From: Asymmetric	Read Replies (1) \| Respond to of 306849

How the Crash Hit 401(k) Investors By TOM LAURICELLA / WSJ July 19, 2009 During the worst of last year's stock-market declines, most investors nearing retirement stayed true to advice warning against responding to short-term ups and downs: They didn't make changes to their 401(k) accounts. Those who did react became more defensive and scaled back on stocks. Which group was right? Was it those who stuck with a buy-and-hold plan focused on long-term results or the minority of investors who tried to protect their nest eggs? Even though stocks are down about 40% from their peak, the conventional wisdom is that investors should have stuck to their long-term plan and not responded to the market downdraft. But a growing number of advisers think that's foolish. With near-retirees having a limited time to recoup losses with the help of a paycheck, they argue it's better to be safe than sorry. Most retirement investors voted by keeping their feet firmly in place. Among investors ages 50 to 59 in 401(k) plans overseen by Hewitt Associates, the percentage making transfers among investments rose just a fraction to 23.2% in 2008 from 22.6% in 2007 -- a year when the Dow Jones Industrial Average hit an all-time high. Older Investors Stand Pat Among investors age 60 and older, there was a slightly bigger increase in the percentage of transfers. But that group was still a distinct minority. In 2008, 21.6% made investment changes, up from 18.4% in 2007, according to data from Hewitt, which conducts an annual survey of more than 2.7 million employees eligible for 401(k) plans. The market downdraft saddled the 50- to 59-year-olds with an average loss of 28% in 2008, a year when the Dow industrials lost 33.8%. Those 60 and older lost an average 19%. Ronald Florance, director of asset allocation and strategy for Wells Fargo Private Bank, says investors who stuck with stocks made the right call in the long run. "When you're 65 years old you still have 30 years" of retirement to pay for, he says. "Should you just be sitting in five-year bonds? Probably not." (Of course, bonds performed far better than stocks during the market crash.) At Fidelity Investments, which studied the accounts of 3.8 million investors age 50 and over, there were signs of caution, however. Among 401(k) investors ages 55 to 59, the percentage of contributions being directed to stocks was lowered to 58.5% by the end of March from 68.4% in September 2007. Fidelity investors ages 60 to 64 cut the new money heading to stocks to 52.8% from 64.4%. "Historically we know there are periods where you could lose a decade's worth of returns," says David Lucca, a partner at Dallas-based Rhoads Lucca Capital Management. "Why would you follow the conventional wisdom?" For investors saving for retirement, ultimately the answer boils down to how a decline in the market will affect post-retirement income. For many, it's not as big an impact as one might quickly assume. The reason is that while still working, an investor can replace some of those losses. Meanwhile, expected Social Security payments won't have changed. As a result, Financial Engines, which provides online advice and manages accounts for 401(k) plan participants, estimates that for those nearing retirement, portfolio declines of 23% to 30% would translate into a 10% to 19% decline in future retirement income. That's still a big loss of course. But even then, Financial Engines estimates that a 60-year-old making $50,000 a year, with a portfolio 49% in stocks and 51% bonds would be able to regain lost ground by delaying retirement from 65 to 66 years and four months. The lost ground would be made up by continued contributions to the retirement account and delaying taking Social Security, which results in larger checks from the government. Working Longer to Catch Up For that same investor who shifted to a more conservative portfolio holding 28% stocks and 72% bonds, Financial Engines estimates that it would take just another three months of working -- until age 66 and seven months -- to get back on track. However, the heavier dose of bonds would limit the potential for additional damage to retirement income. Should the markets do poorly, they estimate annual income at $33,500 from the conservative portfolio, compared with $32,300 for the more stock-biased portfolio. That difference is larger for those with higher incomes because Social Security makes up less of their income in comparison to money from retirement accounts. Mr. Lucca responded to last year's market downturn by significantly scaling back on stocks. In accounts for more conservative clients, he cut stocks from 50% of the portfolio to 35% today. He has another third in high-yield bonds, which often behave like stocks, but has 15% in U.S. Treasurys. As of June 30, that portfolio was up 3% in 2009; over the past decade it has far outperformed the stock market. "The wiser thing is to be prudent," he says. "To say I don't care what happens to my money today, maybe in ten years it will be better, doesn't make any sense."