Market Advice for Retirees

Retirement experts urge return to basics and see no quick rebound for investment losses.

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Misery may love company, but enough's enough. After getting brutally hammered by market declines that are end-of-days irrational, is there any relief for retired folks? And just how are we going to recover the more than $2 million in value that's been lost from our retirement accounts?

Maybe you see a silver bullet here, but I sure don't. A lot of Nobel Prize-winning economists have been telling us the world won't end. How comforting. Meanwhile, government leaders are still searching for effective solutions, and professional investors are setting miserable examples with panicked runs for whatever exits they can find. Markets have recovered a bit, but only a bit, and the prospect of an extended recession has dampened any hope for a quick rebound.

So the overwhelming theme of today's market advice is to suck it up as best you can.

Three thoughts for retirees jumped out from interviews with retirement experts asked for more affirmative guidance and from countless articles on the crisis:

1) Cut current spending.

2) Go back to work. T. Rowe Price has a useful assessment of how going back to work can affect retirement outlooks.

3) Don't bail out of the investment plan you've been following. (And, if you're honest and admit you don't really have an investment plan, well, what better time to develop one than today?)

Experts from Fidelity Investments, the Vanguard Group, and T. Rowe Price emphasized the basics and good habits of financial planning and long-term investing that have stood up well for many years. Yes, the recent meltdown is unlike anything experienced in 75 years. But unless you're trading your home and car for a bunker and a Radio Flyer, the lessons of past downturns have value for today. And if there is a bunker in our future, it doesn't much matter where you are in the market.

"The one thing not to do is don't abandon your investment strategy," says Stuart Ritter, a certified financial planner at T. Rowe Price. "And let me define that strategy, because one of the things we're learning is that people didn't really have an investment strategy going into this.

"An investment strategy means having the right mix of stocks, bonds, and short-term investments for your time horizon and being diversified."

"Some of your portfolio should be in cash," says Vanguard economist John Ameriks. Keep at least six to 12 months of your current spending needs in a money market or other safe and liquid form.

Having a cash cushion gives you flexibility, either to buy securities at today's fire-sale prices or to avoid being forced to sell securities at their low-water marks simply to fund current spending.

"We always speak loudly about diversification," says Michael Doshier, a vice president in retirement services at Fidelity Investments.

Having diversified investments involves the right mix of company securities (whether you buy individual stocks or funds), using company size, industry, and geographic business concentrations as the major variables.

"We are a buy-and-hold company," Doshier says. "Make a plan, and don't veer from it.... When you're making decisions in the heat of the moment," he adds, the odds are that you're not making good choices.

You also should take on a level of risk that's appropriate, and risk here is measured by the kinds of stocks and bonds in your portfolio. Traditional risk-reward rules, of course, have pretty much been suspended by the so-called market pros, which helped bring on the meltdown. But they'll come back with a vengeance as things settle down.

Everyone expects the market to be much more sensitive to risk for a long, long time. So, those dull low-growth and high-dividend stocks that were so unappealing will be very sexy coming out of this downturn. And while venture capital funds may wish to roll the dice on high-technology start-ups, most of us will be happy to stay on the sidelines.

T. Rowe Price has a useful table of how it thinks the percentage of stocks and bonds in your portfolio should change in the periods before and during retirement. It also has a nice take on different investment strategies for retirees in a bear market, which concludes that staying the course was the most profitable strategy after the last market downturn.

In addition to being diversified, Doshier points out the continued virtues of a regular program to add to your retirement investments. Remember dollar-cost averaging? It works.

By buying equities in good times and bad, you naturally buy fewer shares of big winners and more shares of stocks (or sectors) that have fallen in value. Over time, you lower the cost basis for those shares that have been disappointing and reduce your paper losses. You also naturally trim the number of shares you buy in your big winners, which keeps your portfolio in balance as well.

Along with promoting dollar-cost averaging, the experts stressed that periodically rebalancing your holdings is worth a lot of money over time. For example, say you invested $20,000 by buying 500 shares in each of two funds at the same price, say $20 a share. A year later, one fund is trading for $18 and the other for $24. Now, your total investment is worth $21,000, but instead of being balanced between these funds, you have $9,000 in one and $12,000 in the other. Your portfolio is out of whack, and you should buy shares of the $18 fund and sell shares of the $24 fund to rebalance it.

Or, as Ritter notes, you are buying low and selling high, which may be the oldest bit of investment advice in the world but not a bad thing to hard-wire into your plan.