By now many Americans have experienced firsthand the ups
and downs that come with investing. True, we’ve all been
through a very tough year and it’s nothing to belittle,
but history has shown that the markets have a way of coming
back. So, instead of letting fear grip you, it may be more
prudent to take an active hand in rebuilding your portfolio.
Here are five steps you can implement now to help get your
savings back on track.
1. Boost your savings rate
Although you have no control over which direction the
markets move, you do have complete control over how much you
contribute to your workplace savings plan or brokerage and
savings accounts.
So, given what’s happened in the markets since last
fall, you now need to consider how much more you need to
save in order to reach your retirement savings goal. A good
way to get a read on your particular situation would be to
use one of the many online savings calculators available to
you. You might find the
Fidelity® myPlan® Retirement Quick
Check1 tool a useful starting point for
gauging where you are and how much you may need to boost
your current savings rate.
If coming up with that increased level of savings seems
out of your current reach—and for many it may be—try to
do anything you can to bump up your savings rate. If
you’re fortunate enough to earn a raise or a bonus this
year, consider putting the increase toward your workplace
savings plan contribution. If your 401(k) plan has a
matching employer contribution, consider optimizing the
impact of that benefit by making your contribution equal to
or greater than the matching percentage.
“Taking full advantage of a matching employer
contribution should be a top priority,” says Bill Hunter,
vice president of retirement products in Fidelity’s
Personal and Workplace Investing unit. “Otherwise,
you’re leaving what is akin to ‘free’ money on the
table.”
You may also want to consider opening an individual
retirement account (IRA)—either a traditional or a Roth
IRA—or contributing to an existing one. Individuals can
put away up to $5,000 in one of these accounts for 2009, and
those age 50 or over can increase that to as much as $6,000.
Catch-up 401(k) plan contributions—up to an additional
$5,500 per year—are also permissible in 2009 for
participants 50 or over.
2. Tune up your asset mix
Diversification is a time-tested strategy for smoothing out
the inevitable swings of the capital markets. An
all-your-eggs-in-one-basket investment approach is ill
advised for most investors. On the one hand, it can
overexpose you to risk, as in the case of a purely
equity-based portfolio; on the other, it can result in an
overly conservative positioning, as in the example of a
concentration in money market funds, which would stand to
miss out on the upside growth potential that historically
has been evident in equities.
Making drastic shifts away from or toward any one asset
class in this volatile market would also be an ill-advised
strategy. The chances of successfully “timing” the
market—or, in essence, accurately guessing when certain
asset classes are going to move one way or the other—are
about as likely as finding a leprechaun with a pot of gold
at the end of a rainbow.
Asset allocation and diversification make more sense for
the average investor. Maintaining a diversified mix of
assets in your portfolio—a blend that is appropriate to
both your investment time horizon and your overall tolerance
for risk—is always a smart option, and there are any
number of online tools available to help investors determine
what may be most reasonable for them.
If your allocation doesn’t seem quite right at the
moment—if you’re too heavily tilted to the equity side
for someone of advanced years or too weighty in fixed income
for a young investor with a longer retirement horizon—then
tuning up your allocation probably makes sense.
Transitioning slowly into your new plan is key, though, and
you’ll want to take a thoughtful approach.
3. Don’t count out equities
Financial industry research is rife with data illustrating
how investors often tend to move at precisely the wrong
time—bailing out at the bottom of a market pullback or
buying when the market has already peaked. Remember, too,
that selling assets that have plummeted in value due to
recent market volatility locks in what are now only
“paper” losses.
While the stock market has taken its biggest fall in
decades, it is often when markets seem least appealing that
the best bargains emerge. Recent sell-offs in equities have
created what many consider to be excellent buying
opportunities, as stock valuations have hit historic lows in
many cases.
Dollar cost averaging, or putting a certain dollar amount
to work on a regular schedule, means buying more shares of a
mutual fund or an individual security when its price per
share is lower and fewer shares when its price is higher.
“Dollar cost averaging is a way to help realize the
market’s returns over long periods,” says Chris Sharpe,
co-portfolio manager of the Fidelity
Freedom Funds® target retirement date mutual
funds. “And it avoids the perils of market timing.” But
note that investing in this manner does not ensure a profit
or guarantee against a loss in declining markets.
For investors who have a longer retirement time horizon
and are looking for greater growth potential over time,
investing in the equity asset class has stood the test of
time, and now—when there are potential bargains to be had
for some—might be a good time to start building or adding
to the equity portion of a portfolio.
4. Reduce your investment expenses
Counting strictly on market appreciation to increase the
return on your account is not always a winning short-term
strategy. A more effective approach is to try to keep your
investment costs low—shave a few basis points (or
hundredths of a percent) off a mutual fund’s expenses and
they get added right back into your investment return.
Many 401(k) plans offer lower-cost investment options.
Some provide the choice of investing in index funds—those
that seek to replicate the performance of a particular
market or industry—and fees tend to be somewhat lower than
actively managed mutual funds. Many plans also offer access
to special low-cost share classes created expressly for
retirement savings vehicles.
All other things being equal, choosing a lower-cost
option may not save you a lot in the near term, but over
time, because of compounding, you’ll likely notice the
difference.
5. Hatch an alternative plan
If you’re having second thoughts about retiring in the
next couple of years, there may be better options out there
than pawning your grandpa’s gold watch. Since time is not
on your side, you may want to consider working longer in
your current position and putting off retirement until your
nest egg recovers a bit more. Another alternative might be
to take on a part-time job after you retire so that you’re
not depleting your retirement assets as quickly. Note: If
you are currently working in retirement and taking Social
Security, your payments may be less. Consult your tax
advisor for more information about your specific situation.
The goal, of course, is to try to make your savings last.
Sticking to a budget can play a big part in conserving
assets. So, too, can making the decision to skip the
cost-of-living adjustments you might have given yourself and
keeping those assets working for you in their current
savings vehicles. And, spending less while your portfolio is
still recovering will leave more of an asset base to build
upon when the investment environment improves.
When the markets will turn around is still an open
question, even with the substantial resources and
intellectual energy that have been put toward reigniting the
global economy and reinvigorating its capital markets. For
our part as investors, careful assessments of current
retirement savings, thoughtful choices about how to manage
assets going forward, and perhaps some revised thinking
about our short-term goals are the active steps we can take
now to help get our retirement savings goals back on track.
