Your 401(k): What would the planners do?

The Baltimore Sun

It's the dilemma facing just about anyone who dares peek into their 401(k) statements or other investments these days: Should they sell a mutual fund or all their funds?

Just about anything in a 401(k) looks ugly - downright terrifying. So what's a person to do?

This is becoming an increasingly complex decision, even for the pros who are starting to realize that current financial conditions aren't modeling the experiences they've had for the past couple of decades.

"We've been talking people down from the ledge," said Edina, Minn., financial planner Ross Levin.

Individuals without guidance from a professional often fret even more than those snuggled by advisers. That's because many have no idea how to properly invest, and never knew the right way to pick mutual funds for 401(k) plans or other accounts. While stocks were climbing, that didn't bother them. Now it does.

So a look at how financial planners make decisions might help:

Start with a plan:

Individuals tend to pick mutual funds in their 401(k)'s or other investment accounts like throwing darts. One fund looks good - maybe earning more money than another in the previous months. So individuals grab the apparent winner, figuring it's the best fund. With time, however, it changes with the ups and downs in the stock market, and winners start looking like losers. At that point, the individual wonders: Is it best to change course and dump the fund, or what?

Planners proceed differently. They don't look for the "best" fund. They don't give up on funds just because they lose money. They select a variety of funds, because the variety insulates people somewhat from the bad times. They have their clients hold onto the entire variety in good times and bad. In addition, they place different amounts of money in the various types of funds, so they reduce risks while positioning money to grow.

At any particular time, the mixture can look like a mistake, but the planners have clients stick with it because, historically, every awful time in the market has eventually turned into a moneymaker.

Planners might choose a portfolio for a middle-age person that would be divided about like this, and then they would have the person keep it regardless of market conditions:

* 30 percent in one or two funds that invest in large company stocks.

* 10 percent in one or two funds that invest in smaller company stocks.

* 20 percent in one or two international stock funds.

* 40 percent in bonds or cash.

What about the losses?:

If you had that mixture for retirement savings, you would not like what you would see now.

The average mutual fund that invests in large-cap stocks has lost 36 percent this year. Those investing in small-company stocks have lost 35 percent. And international funds have declined 42 percent on average, according to Lipper Inc., which tracks fund performance.

When financial planners see funds behaving like the average, they consider the fund a keeper. They would only unload a fund if, for a couple of years, funds performed worse than the average.

If you mixed stock and bond funds in a 60/40 combination, your loss now might be about 19 percent.

That might seem atrocious. But planners have seen investors recover from such losses within a few years. In the Depression, the stock market dropped 83 percent. An investor who invested $10,000 just before the crash of 1929 would, 10 years later, have had about $12,000.

"If you are a young 401(k) investor, you have nothing to worry about," Levin said.

Surviving emotionally:

Although financial planners rely somewhat on history and urge investors to be patient, history is not a guarantee. For clients who simply can't handle the stress of staying with their investments, they have people shave away some money rather than fleeing entirely.

A person who might have 60 percent in stocks could move some money out of stock funds so they would have 50 percent in stocks. The part that came out of stock funds could be moved into a money market or stable value fund, two of the safest choices in a 401(k). Another alternative: Leave money that's already in the 401(k) where it is in a variety of stock and bond funds, but devote new contributions to a money-market fund.

Contact Gail MarksJarvis at

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