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401(k) Market’s boom/bust cycle teaches valuable lesson

By now the recent meltdown in the market has jarred most Americans awake. They can’t turn on the TV or pick up a newspaper without hearing of how the Nasdaq lost still more ground today, or how economic reports are proving the pundits right the sluggishness of the U.S. market is no longer a point in question. It is in fact a painful reality.

However, given all the information Americans are bombarded with on a daily basis, perhaps the most poignant reminder of the economy’s troubles, and therefore theirs’ as well, awaits them on one little piece of paper that comes in the mailbox quarterly the dreaded 401(k) statement.

Without a doubt, most participants in a company 401(k) plan at one point in time loved receiving them. For most, in fact, their statement was a source of pride and gave them a sense of security.

All of the balances were fatter than the last statement, and the little graph showing the account growth was up and to the right every month. It appeared that there was no end in sight, especially with the tech boom showing signs of strength and the promise of a new economic reality based on the Internet coming to fruition.

A whole generation of millionaires was in the making.


– Boom and Bust Cycle

That is, until the story changed in 2000, and the fairy tale ended. Like Warren Buffett once said, “A pin lies in wait for every bubble.” In March of last year the pin and the bubble found each other, and sent the markets into a devastating freefall that dragged investors, and their retirement portfolios, down from their castles in the clouds to where they are now.

Most are all too familiar with how the rest of the story goes. Unfortunately, many reading this probably lived it firsthand.

More than likely it will take several years for some investors to be “whole” again. And for others, redemption may never come.

However, the market’s boom and bust of the late ’90s taught several lessons that have been revisited repeatedly over the life of the stock market. As in the past, these lessons are learned after the fact.

Hindsight is 20-20 after all. Albeit a tough lesson, investors can learn from the experiences and turmoil of the past year to lay a better strategy for the future.

Are the glory days of the market, and 401(k)’s, over? Doubtful. Will the recovery be quick? Probably not.

Therefore, there are a few steps investors need to take to assume a more strategic posture with their retirement assets. It may be painful, but like it was so eloquently said by Winston Churchill, “Difficulties mastered are opportunities won.” So, what’s an investor to do?


– Determine Where You Want to Be

Investors should start by sitting down and figuring out where they want to be and when. Many individuals fail to look at how far away their retirement really is and structure their investments accordingly.

The result is usually a portfolio that isn’t suitable for the individual. An investor who is five years from retirement will naturally have a different perspective than one retiring in thirty years.

The key is to be specific and write it down. Do they want to retire in 20 years? How much money would they like to have saved for that fateful day? What will retirement look like, and how will this money figure into the mix? Goals that are never specifically determined are seldom realized. The key ingredient to ensure failure to reach a goal is lack of preparation and direction.


Individuals should think it through, be specific, and answer the key questions of:

o What specific goals do they have?

o How far away are those goals?

o How aggressive do they want to be in realizing those goals?

After determining their goals, the next step is to honestly evaluate the current situation in light of those goals. Cerulli Associates, a Boston-based research firm, recently found that 401(k) plans are losing money for the first time since their inception 20 years ago.

The reason? Investors are loading up their retirement portfolios with high-risk stocks and company stock. Most often than not, investors are chasing what is popular at the time, and not necessarily what is suitable for them long term. The only thing they are guaranteeing is that they’re buying expensive stocks that may not be “hot” next year.

This is the time to pull out the statements. Does the current allocation match their risk tolerance and time horizon? Have they loaded up on what’s popular, or is the asset allocation a good mix given the stated goals?

Even within a company retirement plan, investors should consider a diversified portfolio consisting of stocks, bonds and international investments. Most 401(k) administrators provide tools that enable participants to develop an asset mix that is suitable for their situation.

If they are uncomfortable with developing it alone, seeking the help from their plan administrator or a financial advisor might be a prudent move.

This step is particularly important if a large portion of their retirement assets is in company stock. Individuals who have a bulk of their retirement assets in company stock are in a precarious position, and should diversify some of those assets.

Once an individual has decided on their goals, and determined where they stand, all that is left is implementing the plan. When it comes to retirement plan, this usually involves two steps:

o Develop a well-thought-out asset allocation strategy. Most financial professionals agree that a diversified portfolio including stocks, bonds, and international investments is a prudent game plan.

Whatever fits the individual’s personal situation best is what they will want to develop. As was mentioned earlier, there are plenty of resources to assist investors in developing a strategy specific to their situation.

o Reallocate assets as necessary to bring the plan into line. If a portfolio currently allocates 90 percent of the assets to aggressive stock funds, and it is determined that should only be 30 percent, assets should be moved from one area to the other. The great thing about 401(k)’s is that can be made with no tax consequences.

The ride has been rough recently, but the market has taught several lessons that, if heeded, may yield significant dividends down the road. The essential thing for individuals to do is to start, and start today.

Kaiser is an investment adviser with Executive Financial Planning, Inc., and a registered representative with FSC Securities Corp.

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