Behind the Eight
Ball?
If you lost a wad on Wall Street
lately, don't
risk a worse fate by investing in chancy schemes
By Heidi Russell Rafferty
The
gyrations of the stock market during the past 18 months have jolted
investors 50 and older, many of whom fear they will have to work more
years than they had planned before they can sink into a plump and
cushy retirement.
“The people who got hurt came to the party late,” says Kurt
Dressler, an investment representative for Capital Investment Group
Inc. of Raleigh.
But Dressler and other investment consultants agree there is still
hope for those who have lost ground chasing a technology dream. If
you’re one of them, you can still rely on three basic, time-tested
rules of the market to re-establish your financial security:
 Don’t panic.
Diversify your investments.
Always keep the long-term
view in sight, regardless of how little time is left before your
retirement age.
Some people were in trouble long before the Sept. 11 tragedies rocked
the U.S. economy, investment consultants say. Your situation today
depends on how you were invested during the last year-and-a-half.
“For those who maintained a reasonable approach with allocation
between stocks and bonds and weren’t worried about chasing returns,
they’re feeling pretty good,” Dressler says. “For those who got
caught up in making money in a short period of time, I imagine
they’re not feeling good. This thing is not fun. But if you were
invested in a balanced approach — as you should have been if
you’re nearing retirement — then this thing has been tolerable.”
Thus far, there have been no concrete studies on how the latest market
slump has affected people 50 and older. But analysts are gauging the
fallout by general anecdotes and deductions that can be drawn based on
how investors across the board have been hurt.
In total, more than $4.5 trillion in stock wealth has been lost since
the beginning of 2001. Older investors also have been hit by declining
interest rates on money market accounts and certificates of deposit,
which are at their lowest levels in 20 years.
Meanwhile, the rate of contribution to retirement accounts has slowed.
Last year, retirement assets invested in mutual funds through IRAs and
defined contribution plans declined 2 percent to $2.4 trillion,
according to the Investment Company Institute in Washington, D.C., the
national association of the investment company industry.
In addition, while the average account balance for 401(k) participants
remained essentially unchanged between 1999 and 2000, for older folks
it actually declined. The Investment Company Institute reports that
for those in their 50s, the average account balance dropped 2.3
percent. For those in their 60s, it dropped 5.8 percent. Conversely,
those in their 20s saw a 26.9 percent increase in their 401(k)
balances.
Panicking Is Optional
But financial counselors say they have observed coolness among older
investors, perhaps because they have been through a number of down
cycles before. They weren’t surprised by the latest one, says Dennis
Dougherty, founding and general partner of Intersouth Partners, an
investment management consultant group in Durham.
Dougherty says he also was affected. “I am cautious and wish things
were different, but I’m not distressed, and I’m not blue. I
didn’t sell any stocks when they started down and regret I didn’t
have a crystal ball,” he says. “(The market) will come back. The
question is when, and will I be smart enough to buy?”
Bob Jackson, the North Carolina director for the American Association
of Retired Persons, agrees that his members have not panicked.
“Most of our members have lived through these times before, and they
have the staying power and patience for our country and our state to
hang together,” Jackson says.
People now must ask themselves whether it’s time to accept their
losses or hang on to what they have, hoping they will regain some of
their stock value.
Alan Mott is president of National Senior Advisory Counsel LLC, a
national senior retirement planning organization based in North
Brunswick, N.J., that holds public forums around the nation. Mott says
that he has encountered a number of seniors who “are on the
fencepost.”
“They’ve lost too much to accept their losses and are now stuck in
the mindset that, ‘I’m going to stay until the market comes
back,’ ” Mott says. “I don’t know – how do you tell the guy
who’s down to $25,000 from $250,000 to stop?”
Donald Cassidy, senior research analyst for Lipper Inc., a Reuters
company that analyzes mutual funds, says knowing when to sell is one
of the most difficult decisions for investors. Cassidy, who is based
in Denver, Colo., explores the psychology behind selling in his book,
It’s When You Sell That Counts.
“There’s an excuse for not doing it anywhere. Because the future
is unknown, hope is eternal,” Cassidy says. “Opportunity is there
as long as you don’t close the door, and selling is closing the
door. I doubt as many people as should have cut back on their risk at
the high point a couple of years back.”
If you’re struggling with this question, consider an old rule of
thumb — the “Rule of 110,” Cassidy says. Subtract your age from
110, and the result is the percentage of your invested assets that you
ought to have invested in equities. The rest should be bonds, money
markets, etc.
“The result is that to do the right thing, you always have to do
what’s uncomfortable,” he says. “Months ago, people were scared
to death. The smart thing to do was sell the bonds making you
comfortable and buy stock. If you’re moving toward emotional comfort
with investments, you’re probably doing the wrong thing for your
financial comfort.”
Dressler of Capital Investment Group agrees, noting that you should
also revert to where you wanted to be two years ago.
“If you decided you wanted to be 60 percent in stocks two years ago
and now you have 45 percent invested in stocks, I think it’s prudent
to wrap that position back up,” Dressler says. “Look at your total
value and bring it back into line with what was appropriate to begin
with.”
Strength Lies in Diversity
Advisers agree the biggest mistake a person could have made was
throwing money at technology stocks. But there’s still hope even for
those people, as long as they maintain a diversified approach now.
“They say every dog has his day, and you need to have real estate,
stocks, bonds, cash, personal property and stocks in different
industries,” Dougherty says. “I think that every statistic shows
that over a long period of time, that adequate diversification makes
people the most amount of money as opposed to getting lucky on one
stock that takes off.”
The first step is to continue to contribute to your 401(k) plan and
your mutual funds, says A. Hobgood, a senior managing director for
Hobgood Peatross Investment Group, a division of Scott &
Stringfellow Inc. in Raleigh.
“The fear is pretty prevalent right now, and mutual fund withdrawals
have been significant. But stick with them. I would increase my
savings rate to them,” Hobgood says.
He notes that in the last five years, if you were fully invested
through June 30, 2001, the average annual rate of return would have
been 14.5 percent. If you missed the best 10 days of the five years,
you had a 5.1 percent return.
“That’s pretty amazing,” Hobgood says. “If you missed the 20
best days, you had a small loss those five years. Those of us who
think we’re smarter than the market, it’s difficult for us. Stay
in it and be diversified with some mid-cap, small-cap, large-cap
value. Most 401(k) plans give you a multitude of choices.”
Cassidy notes that mutual funds give you the benefits of
diversification and professional management.
“They’re less risky, in the academic sense,” he says, adding
that now is not the time to pull out, even in an 18-month bear market.
“People get scared. They always do the wrong thing when it hits
bottom.”
And don’t discount CDs or money market accounts, even with the lower
interest rates, advisers say.
“They still have their place in the overall portfolio,” Dressler
says, noting that mid-term and longer-term bonds also can offset some
of the stock losses. “As interest rates have fallen, the bond rates
appreciate in value. That’s the function of the bond markets. …
New bonds come out at a lower yield, so the ones you bought a while
back are more attractive, so the market will pay you more in par value
for them.
“That’s part of the reason behind a balanced investment
approach.”
Mott at the National Senior Advisory Counsel says fixed accounts can
be a lifesaver for the elderly.
“Certainly, if you move into a fixed account you’re accepting your
losses and never getting your money back. You have to decide if that
is the place you want to be. It’s the lesser of two evils,” he
says.
Planning for the Long Haul
Regardless of past losses or your age, however, forward thinking never
hurt anyone, advisers say.
Dougherty says that although he has lost on his technology stocks, he
has no plans to sell — not yet, anyway. He advises others to hold on
to theirs, too, because the future can only be brighter.
“If you have tech stocks that are low values, as opposed to those
that will disappear from the face of the earth, the one way you can
guarantee you’ll lose money is to sell them and turn them into
cash,” he says. “There is no good reason for that. If you hang
onto them, the case is more likely that they’ll go back to somewhere
better than they are now.”
Dressler notes that there are plenty of good technology stocks down 75
percent off their highs. “Some of the risk is out of them when
they’re crushed,” he says.
He cautions, however, that although you want to maintain your position
in the market, “that doesn’t mean sell it all and put it all in
technology stocks.”
“Look at what you have now and let what’s happened be
history. If you’re looking at losing half your money and you want it
back, it might just lead you to further mistakes. Considered that what
happened, happened and (you) need to earn a decent return going
forward and not think about recover or recoup. If you’re trying to
double your money in an attempt to get it back, it could lead to
further mistakes.”
For example, someone might consider sinking money into real estate,
with the hope of making quick recovery in two years or so, he says.
But that can work against you. If you put up $10,000 for a $100,000
purchase and it falls to a $90,000 value, you’ve lost your $10,000.
“If the economy continues to falter, there’s no reason real estate
prices won’t suffer as well,” Dressler says. “Keep your eyes
open regarding leverage. It’s not a guaranteed 5 percent
appreciation — it can go the other way. And if it does, it can put
you in a very poor situation.”
Hobgood says that in regard to planning for the years ahead, never
forget the power of compounded interest.
“Most of us that started at $25,000 and put 5 percent aside thought
it seemed like very little. Twenty years later, the power of
compounded growth is amazing,” Hobgood says. “If I had any advice
to give, I’d say increase your savings rate if possible.”
Dressler also notes that when thinking of the future, always keep the
past in mind.
“I think it’s a reasonable approach for someone to have invested
in a balanced approach — 60 percent in stocks and the remainder in
bonds and cash equivalents. That approach would have worked well. You
would not have made a lot of money, but you would not have lost,” he
says.
“A year-and-a-half ago, people did not want to buy bonds, but now
they wish they had. There is a normal tendency to chase returns.
People go where the money has been made in the past rather than what
hasn’t worked.”
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