By Kimberly DiMaria
The Daily Record Newswire
Every 401(k) investor knows that in order to make the most of your retirement savings, you buy mutual fund investments and hold them for the long term. During market fluctuations, you will reap the rewards of dollar cost averaging; i.e., buying investment shares when prices are low, and benefiting when prices move higher.
Market timing to beat market ups and downs doesn’t work for the average investor, so buying, holding and weathering market downturns is the answer to a healthy retirement next egg, right?
Well, maybe not.
This strategy only works for those in the workforce who have the benefit of another 20 to 30 years until retirement.
For example, the last bear market (from approximately October 2007 to March 2009) experienced about a 52 percent decline. If your 401(k) account declined by 47 percent, as many people experienced, you’ll need to achieve “heroic” returns just to get back to even.
In fact, you would need an 88.68 percent return in order to reach your pre-market drop position. That kind of market return is pretty impossible in the short term, say the next five years.
The last bull market (1982-2000) lasted 17 ? years, with a cumulative return of 1,408.9 percent and an average annualized return of 16.84 percent. What if you’re only five to 10 years away from retirement?
Hopefully you see my point.
“Breaking even” simply isn’t enough when you’re approaching the end of your working life. Wealth accumulation is.
Let’s look at it another way. Historically, our stock market has experienced alternating secular bear and bull markets. Each of the three past bear markets (1906-1921, 1929-1942, 1966-1982) lasted on average 15 years.
The current bear market is running on nine years and, unless you have a crystal ball, March 2009 may not have been the end. Only time will tell. The bull markets that followed each of those bears did produce some impressive returns, and had some longevity too — anywhere from eight to 24 years in length.
But consider this: if you are 55 to 65, you’ve experienced a 47 percent loss in your account value, and it’s going to take the next five to 10 years to break even, can you retire on that?
George Bernard Shaw’s observation that “youth is wasted on the young” might be appropriate here to some degree. Younger workers have the time to weather an investment storm of ups and downs, but generally don’t have significant capital invested yet. Their older counterparts, however, have the invested capital, just not the time!
So what is the best approach? There are several strategies that older investors — those nearing retirement — might take to protect their nest eggs while continuing to accumulate wealth.
First and foremost: action. Investment apathy is not a good thing. It’s dangerous to simply select investments, put money into a retirement account, and never look back as five, 10, 15 or 20 years go by.
At a minimum, every investor should annually review his or her investment asset allocations.
Based upon the number of years until retirement and risk tolerance, investors should adjust their investment portfolios to make sure they aren’t invested too aggressively or too conservatively to reach their goals.
Second: Continue making contributions. Your chances of accumulating savings for retirement are pretty slim if you fail to put some of your spendable income into a retirement savings account. Also, there’s still a lot of wisdom in dollar cost averaging by buying investments at lower bear market prices.
Third: Seek professional money management advice. If you don’t have the knowledge, time or desire to actively manage your retirement investment account, consider hiring someone who does. Active management is important. Finding a professional who can help you miss most of the bear market downturns and hit most of the bull market upturns could be the key to success for many investors.
Nobody can ever predict what the stock market will do. But don’t wait for the “bear” to leave the room before you take the “bull” by the horns and become an active participant in managing your retirement savings. Use the tools provided by your employer, plan service provider, and investment professional to your advantage, and build your own financially secure retirement.
Kimberly DiMaria is the manager of marketing and corporate communications for EPIC Advisors, Inc. She can be reached at (585) 232-9060; www.EPIC1st. com and www.401kTALK.com.
