What Should I Do with My 401(k)?
from the NY Daily News
THE ASSOCIATED PRESS Tuesday, September 16th 2008, 3:08 PM
Q: Should I be considering changes in my 401(k) in response to the rapidly changing financial services sector?
A: If you’ve been watching your 401(k) you likely know there has been a significant impact on your investments from the bear market, a prolonged drop in stock prices often defined as a 20 percent drop over at least two months. The market reaction to Lehman Brothers‘ Chapter 11 bankruptcy protection filing should not push you into selling off stocks in a knee-jerk fashion, said Rick Meigs, founder and president of the 401khelpcenter.com, a Portland, Ore.-based company which advises industry professionals. “What’s going to happen is at some point in time down road, perhaps six to 12 months, the markets will start climbing and you’re going to be out of the market.”
You likely will not be able to anticipate the upswing, which may occur quickly. It’s a basic truism that the market can never be predicted and you could lose out on an opportunity to recapture some losses.
Underscoring that you shouldn’t be reactionary, Meigs said you should look at your asset allocation and rebalance only if you had planned to.
For example, he said, some people may have an overly aggressive investment plan in which all of their money is in the stock market.
If you’re 55 and you’re 100 percent in stocks, you’re probably too aggressive and you should allocate more money in bonds or other safer investments to spread out chances for loss.
He said the decision about whether to reallocate should be guided by your analysis of risk and how close you are to retirement.
Meigs stresses that you should tinker with allocation only as you might in a normal market.
Otherwise, he said leave it alone and ride out the storm.
In response to the Lehman Brothers announcement, Meigs offers two pieces of advice:
*Check to see if your 401(k) plan offers financial advice from a professional. Many do. Take advantage of that and discuss your portfolio balance.
*Ask your 401(k) administrator at your employer — typically someone in the human resources department — whether you have Lehman funds in your 401(k) plan and if so determine your exposure to financial and other sectors which may guide your rebalancing.
Q: Should I consider converting assets to cash or certificates of deposit, or anything that might be safer than stocks?
Having accessible cash or money in CDs is a good part of a balanced financial plan in the event you need money on a short-term basis, said Diahann Lassus, of Lassus Wherley & Associates, a New Jersey fee-based financial planning firm. But transferring significant invested assets as a reaction to the market is not good planning.
Going to cash and CDs now means “you’ve given up all your gains plus you’re going to miss out on any opportunity when the market recovers,” she said. It addition, you’d pay additional transaction costs to make the change.
Markets always recover, said Lassus, who is chairwoman of the National Association of Personal Financial Advisers. She said it appears the Lehman Brothers case has been handled in an orderly manner and the invested assets will likely be transferred to another company.
The Securities Investor Protection Corp., a nonprofit membership agency that steps in to make investors whole when money or securities appear to be missing in brokerage bankruptcies, said it’s not needed in the Lehman case because no money appears to be missing.