Investors Finally Have A Reason To Cheer

By Jonathan Starkey
Washington Post Staff Writer
Sunday, July 26, 2009

Investors saving for retirement have been battered and bruised for months by a stock market that left them with few places to hide. But recent gains have taken the sting out of opening those financial statements and offered a glimmer of hope.

"There's been some substantial recovery in the real numbers that count, which are dollars in savings accounts," said Michael Doshier, a vice president of Fidelity Investments' workplace investing group.

Account balances on 401(k) plans administered by Fidelity grew by 13 percent from the end of March through the end of June, according to the company, which manages $1.36 trillion in assets. Not all of that increase can be attributed to market improvements, as the figure is affected by participants' contributions and withdrawals. But equity gains have been the driving factor, Doshier said.

The Standard & Poor's 500-stock index, a broad measure of the U.S. stock market, gained 4.1 percent last week to close Friday at 979.26. Since hitting a 12-year low on March 9, the index is up 45 percent. The Dow Jones industrial average, an index of 30 blue-chip stocks, has climbed 39 percent since early March, and last week it closed above 9000 for the first time since January.

Fueling the recent gains are signs that the worst of the recession may be over, including upbeat corporate earnings reports and improvement in the feeble housing market.

Stocks rose sharply during the past two weeks as a host of companies issued unexpectedly strong quarterly results, including Ford Motor and manufacturing conglomerate 3M, in large part because of aggressive cost-cutting. The gains led Standard & Poor's to raise its profit forecast for companies in the S&P 500.

On the housing front, investors drew encouragement from the National Association of Realtors report showing that sales of previously owned homes rose 3.6 percent in June to an annual rate of 4.9 million. It's the third consecutive monthly improvement, though the level of sales is still low by historical standards.

Rita Cheng, a financial adviser at Ameriprise Financial in Bethesda, said most of her clients have capitalized on depressed stock prices by continuing to make contributions to their retirement plans during the downturn, using the same amount of money to buy more shares in their mutual funds.

"They continued to get their match" from employers, Cheng said. "They continued to invest when the market was slow, so they were able to buy more shares. Now when the market has come back some, they can see the benefit of having purchased those shares at a lower price."

Despite the recent upswing, U.S. stocks still have a long way to climb to reach their all-time high. The S&P 500 peaked at 1565.15 on Oct. 9, 2007 -- 37 percent higher than Friday's close. That leaves investors with significant ground to make up.

For example, an investment of $10,000 on Jan. 1, 2007, in the Vanguard Windsor fund -- a common option for participants in 401(k) plans -- would have grown to $10,773.22 by Oct. 9 of that year, according to data from Morningstar. One year later, as the recession deepened and financial markets tumbled, that $10,000 would have shriveled to $5,485.40.

By March 9 of this year, the bottom of the market, the investor would have lost 57 percent, and been left with a balance of $4,268.44.

"There was nowhere to hide with the exception of your bank account," said Tracey Baker, a financial planner at CJM Wealth Advisers in Fairfax.

At the end of trading Thursday, however, market gains would have driven that $10,000 investment back up to $6,540.49, still down 35 percent from the peak but a measurable improvement from March.

Cheng and Baker recommended that retirement plan participants continue making contributions, if their financial situation allows, to take advantage of depressed share prices. Cheng said participants should contribute enough to obtain the full match from their employers.

Overall, retirement investment trends have not been driven by dramatic market shifts, according to Sarah Holden, senior director of retirement and investor research at the Investment Company Institute, which represents the industry and tracks flows of funds.

The majority of 401(k) investors have continued to make their monthly contributions, she said, though many saw massive losses. Estimated total 401(k) assets fell from $3.025 trillion in December 2007 to $2.350 trillion at the end of last year, according to an ICI report.

"Most people did not give up on their accounts," Holden said. "The bulk of people stuck with what they had been doing. There is very much a paycheck-by-paycheck commitment."

Robert Benjamin, a spokesman for Baltimore-based T. Rowe Price, said the firm advises clients against making long-term asset allocation changes based on extreme one-year events.

"This is a real lesson," he said. "401(k) money is long-term money. Even in your 60s, it's long-term money."

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