Protecting Your Nest Egg From a Bear

By Martha M. Hamilton
Sunday, February 10, 2008

What a weird, irresistible urge it is -- this compulsion to sell low and buy high.

I can't tell you how many folks I've heard from in the past several weeks patting themselves on the back for getting out of the market as it continued sinking, locking in losses that until then had been only on paper.

And some of the losses were considerable. The Center for Retirement Research at Boston College estimates 401(k) savings plans lost about 9 percent of their value between the market's peak on Oct. 11, 2007, and the end of January.

Selling when prices are plummeting underscores the terror that many individual investors feel when the market turns into a bear. Especially if you are at or near retirement, watching your nest egg shrink can tie your stomach in knots.

Unless you have planned for it.

That's why I asked two experts to talk about how to protect retirement savings from bad timing. With the right tools, you can reduce your need to sell investments bumping around at record lows and ride out the bad times until the market shifts.

The experts I talked to are Marjorie L. Fox, a principal in Fox, Joss & Yankee, a fee-only financial planning and investment management firm in Reston, and Sri Reddy, head of retirement income strategies for ING U.S. Wealth Management. They both started off with the same point: the need to have a diversified portfolio.

Asset allocation -- putting your money into investments that tend to perform in different ways at different times -- is one of those phrases that makes eyes glaze over. Most of us don't pay attention to it, and some of us who do don't really understand the concept. It's not just owning multiple funds.

As I wrote in an earlier column, I thought I was diversified until I realized that although I had different funds, there was a lot of overlap in their holdings. That was because they all had similar investing goals.

If you are doing your own asset allocation, you need to redo it from time to time. "There are people who start working with an employer, set their asset allocation, and 15 years later they're still contributing to the same funds," said Reddy. The problem? Some will have grown faster and others more slowly, so your mix of assets will have changed.

More companies are offering investment choices that do the asset allocation for you. These life-cycle or target-date funds, aimed at a forecast date of retirement, start more aggressively and become more conservative as you approach retirement. But some people can't leave well enough alone: They buy other funds or sometimes even more than one target fund. The first approach will throw out of whack the asset allocation that has been done for you by the target fund. And two target date funds? That's not really asset diversification.

Fox said that having a diversified portfolio spared her clients from having to take losses in the bear market of 2000 to 2002. Instead of having to cash out of stocks that were in free fall, they were able to sell other holdings, including real estate investment trusts and commodities, which were going up. And they needed to sell them to keep their portfolios in balance.

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