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Copyright © 2010 Irene A. Majchrzak
Yes, the values of various stock are falling every day and the media can not make up its collective mind if we are coming out of the recession or if there is still a long road ahead. What does all of this mean to you, the average investor. Well, if you are still working and contributing to your pre-tax 401(k)'s, 403(b)'s, or IRA savings your strategies for salvaging your retirement will include reviewing all of the investment options found in your 401(k), etc.
Many of the pitfalls within an employer based pre-tax plan begin with the investment choices placed in the plan. The lack of experience in setting up 401(k)'s, etc. caused the corporations to rely upon their need to develop "something" for their employees to invest in on a pre-tax basis.
Pensions were being dissolved, rolled into other pre-tax accounts for the employees and eventually led to the current investment decisions you still may have in your 401(k); either too few or too many mutual fund choices, little differentiation between the funds of any one category and often very little real diversification of the portfolio.
The pre-tax mutual funds did not offer a mix of large, mid/small or international funds in either a growth, value or blend style. Often one mutual fund may contain the same stock corporation found in two or three other mutual funds within the same pre-tax plan. As your plan grew it was not an issue because all of the mutual funds were growing because of the same stock, but in a bear market the same stock flowing throughout all of your mutual funds could cause a major decrease in fund values.
Your responsibility begins by reading the descriptions of the asset choices within your particular plan. Besides a company stock purchase plan your options may include 5-10 mutual funds. You may have one or two of all of the following options; cash options, bond choices and asset classes in large, mid or small capitalization companies in either value, growth, or international stock companies.
Look for the diversification within your employer plan.
Basically, a mutual fund consists of a small percentage of multiple corporations within one asset class chosen by a fund manager to balance and support the companies inside the mutual fund. For example, if the fund manager purchases large capitalization companies like Coca cola, he might balance it with Pepsi products; purchase Mac Donald's and support the fund with a Burger King purchase. The fund may own a variety of different segmented companies as well, and may include purchases of health care corporations, oil companies and/or financial institutions.
Next, ask your investment company to send you a fact sheet which describes the mutual fund, explains how the companies are chosen inside the fund and the names of the top ten companies owned by the mutual fund. You will be interested to know how your mutual fund is constructed. Is the fund heavily invested in oil companies, banks, mortgage companies?
In the current economic situation you may want to discuss this mutual fund with your advisor.
Asset classes are cyclical and move from value to growth, and back. They also favor small cap, international, large cap or bonds at various times in the market environment. Risk and reward are the two major factors an investor needs to look at when considering his asset choices.
In the market failures of 2000 to 2003, value funds were often discounted as unfavorable to investors. The world was invested in Blue chip Growth. But value became the place to be for the next 4-5 years. Cash was also belittled as most investors felt that cash wasn't working if it was in the bank. Yet cash was seen to be an important commodity during that bear market as it is in today's.
The most important ideas to recognize is that the stock market has never been more global than it is today. Factors affecting our economy are having an effect on the whole world. So new strategies are important and understanding the economy and its effect on your investments is essential to the renewal of your savings. You need to be able to speak to your advisor and help him to realize that you are an active participant not a bystander in your account. You will want answers from him/her. So know your questions. Remember that you can change your investments in 6 months or a year from now as the stocks weather the storm.
Today, your risk may be less aggressive, you may want to put more money into cash, you may want your advisor to actively discuss dollar cost averaging your money into the market slower than your monthly contribution. Ask for suggestions and strategies. Ask your advisor to describe the market economy for growth or value investments. Ask him to show you fact sheets that describe the construction of a recommended mutual fund. Feel comfortable with the ideas.
Stock market issues affect investors differently. You will want to recognize that there are some issues that will not affect you at the same level that it may disrupt the savings of your friends over 65. What to do if you are over 65 and you are no longer saving into your investments? Preservation of your cost basis is key.
This market may start to come back soon but based on what happened in 2000, I would suggest that you may have 3-5 years of leveling and fluctuating markets. I would suggest talking with you advisor and moving into cash or bonds. Have him discuss the bond funds that he is recommending and find out how it is being affected specifically, in this market. Do your own research as well. Move into cash and dollar cost average your money back into the market as slowly, or quickly as you feel comfortable.
If you are invested in annuities you may still want to move into a cash fund within your annuity and then reinvest your cash slowly back into the investments within the annuity.
About the Author:
Irene A. Majchrzak helps people retire debt-free with a sense of well-being and the freedom to have the things they want. Get her free ebook, Debt Free to Retire, by going to http://debtfreetoretire.com/
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