Keep an eye on investment fundamentals to navigate through choppy markets
DES MOINES - Millions of 401(k) accounts have made up lost ground over the last 10 months. Helped by a stock market surge and continued contributions, the question now is how to keep from backsliding when market momentum slows or reverses.
With the market up more than 60 percent since it hit its low in March, many believe a sharp downturn is likely. The last thing investors can stomach is the market reversing itself and snatching away more of their retirement money.
So, what to do now?
Don’t forget the fundamentals. Specialists recommend revisiting the basic principles of investing, and offer some additional moves to consider.
A starting point for those who are heavily reliant on their 401(k) is to make sure their portfolio reflects their appetite for risk. This is a personal choice because it should be centered on how much longer you must work to meet your retirement savings goal and how comfortable you are with losing some of your money.
A key focus in making this assessment is to determine if you have an appropriate asset allocation. This means choosing a blend of stocks, bonds, cash investments, and other options such as commodities or real estate. A variety of investments helps lessen risk because different assets generally don’t move up or down at the same time.
The next step is to look within those asset classes to determine if you’re properly diversified. This approach enables investors to adjust the risk in their portfolio by including a mix of a certain type of investment, say, large and small company stocks, and stocks from foreign and domestic companies.
After reviewing these concerns, you may find you need to rebalance your portfolio. Rebalancing is adjusting how much money you’re putting into each asset classes to fall in line with your original targets. It’s necessary because over time stocks may grow faster than bonds.
The easiest way for most people who don’t have time to spend analyzing the market to weigh all of these issues is to get into a target date fund. It’s a mutual fund that automatically adjusts the mix of stocks, bonds and other investments as you near retirement. Though the market continues to move upward, you should resist making retirement investment decisions on the odds of a market correction, said Alan Skrainka, the chief market strategist for Edward Jones, one of the nation’s largest financial services companies. “Nobody knows what’s going to happen in 2010. Since you can’t predict, you must prepare,’’ he said.
That means sticking to three key principles - hold quality investments, diversify broadly, and hang on for the long term.
Some specialists are confident the market will continue to gain value this year through higher trading volume, economic activity growing, and corporate profits coming in above expectations.
David Pitt is a personal finance writer for the Associated Press.