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It's Time To Assess Your 401(k)

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By DAVID PITT

The Associated Press

Published: December 28, 2008

Investors have been running scared. Through early November, $219 billion was pulled out of stock mutual funds according to TrimTabs Investment Research. That comes on the heels of five straight years of investors pouring cash into their stock funds.

This year has seen a massive flight to safety as investors have shifted to bond funds and other safe havens. Money-market mutual fund assets are up 20 percent so far this year, according to the Investment Company Institute. But now that all that money has shifted around, where does that leave you?

Despite the ongoing market uncertainty, with the end of the year just days away it's a good time to take a look at your 401(k) to see whether you need to rebalance your asset allocation - meaning the amount of money invested in various asset classes such as stocks, bonds and cash investments. Market losses and gains, if you have any this year, may mean that your portfolio is no longer in sync with your investment goals.

"Investments are the only thing in the world where people don't want to buy things on sale," said Tom Ruggie, president and founder of Ruggie Wealth Management in Tavares. Though it's preferable to buy into a down market, he recognizes the reality that investors often stay sheltered for too long because buying in a down market doesn't feel good.

In this market, rebalancing can help prevent you from becoming too conservative. For investors with a longer time horizon, this may mean buying more stock to reflect their higher risk tolerance. Adjusting your portfolio helps to rebalance both your market risk and inflation risk.

For instance, if you scaled back your stock investments to limit your exposure to market volatility, you likely increased your inflation risk.

That's because stocks earn the highest rate of return over time. By assuming more risk, stock investors are rewarded with a larger buffer against inflation, which stood at 3.7 percent in October. Witness the 10-year annualized return of 5.4 percent of the Barclays Capital U.S. aggregate bond index.

Many advisers recommend an annual check to see whether your allocation fits your risk and timeline. Some recommend checking twice a year, even a quarterly checkup may be warranted when the market changes rapidly as it has in the past few months.

The first step to a proper balance is deciding how much risk you can handle and how far away retirement is for you. The younger you are and the further away from retirement, the higher your stock allocation should be, perhaps as high as 70 percent.

The closer you are to retirement, the less you should be invested in stocks to avoid losing too much in a down cycle. This is the very tough lesson many of today's near-retirees have learned. Those a few years from retirement with too much invested in stocks lost large portions of their retirement accounts.

"If investors are close to retirement and they've been heavily invested in equities at this point it's a little bit like the horse is out of the barn," said Dean Kohmann, vice president of 401(k) plan services for Charles Schwab & Co. Inc. "To go back and try to get a conservative allocation now, it's a tough decision because essentially you're locking in your losses."

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