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Tuesday, March 13, 2012
In After the Storm. the Little Nest Eggs That Couldn't, Steven Greenhouse quotes Jonnie Worth who says “Like everyone else, I watched my retirement savings plummet” . “I lost a big percentage of my investments.” She worked at JP Morgan Chase - a place where one would think that good investment advice was available. Anyways...let's think about Ms. Worth's situation. In the latter half of 2007, the stock market reached its all-time high - worth noting.
In 2008, of course, stocks plummeted. A well-diversified portfolio invested basically 65% stocks/35% bonds was down 22.6% for the year. By the way, this allocation is more aggressive than most near- retirees would choose.
Granted, those who sold out during this period locked in a loss. If it was panic selling, they probably didn't get back in. Ms. Worth is likely in this boat, with others. Again, this isn't investing - it is market timing, etc. It's watching the dice roll and trying to decide when to place a bet. This is fodder for behavioral finance experts.
Investors, on the other hand, continued to contribute to their 401(k) and other investment accounts. Some increased their allocation to stocks on the grounds that it was the sale of a lifetime.
How did an investor do who stayed the course? By the end of 2011, the diversified portfolio mentioned earlier was up 7.2%! This doesn't account for contributions during the period - it is just the value of the portfolio assets from the beginning of 2008! I t also doesn't take into account the push higher we've seen in 2012.
The bottom line is simple. Most retirement assets should be invested in line with a well thought-out asset allocation model that can weather not just calm seas but stormy ones as well. If you can't emotionally do this, hire an advisor to do it for you. If you have an overwhelming desire to gamble, limit it to 20% or less of assets. You or that advisor with the great track record might be the next Warren Buffett, but (I hate to be the one to break the news!) probably aren't.