HELP! My 401K Is Melting (Retirement)

Help! My 401(k) Is Melting
By John Rosevear
September 23, 2008

It has been a rough few weeks in the market, and nothing creates a bull market in investment advice like market turbulence. It seems like every morning brings, along with a fresh round of gut-wrenching news about bailouts and bank disasters and commodity price jolts, a fresh round of "what to do with your 401(k)" stories from the major media.

The thing is, many of the "advisors" driving these stories bring their own biases and predilections to the table, and that means there's a lot of odd and conflicting advice out there. In the past few days, I've taken in a whole bunch of these advice stories, in both local and national media. I've heard some great ideas and some crazy ones, and I've tried to sort through the pile to get to some simple rules of thumb.

Here's my take on the best approach to this mess for those who are at least seven to 10 years from retirement. (I'll follow up with thoughts for those approaching or in retirement in a separate article.)

Things to do
Do remember that bear markets, even scary churning bear markets where everyone's fear levels seem fixed at near-panic levels, are a normal feature of our markets. They've happened before, they'll happen again, and this too shall pass -- in all likelihood, long before it's time for you and me to retire. There's no reason for us to panic, even if the pros are.

Do remember that the most apocalyptic predictions you see in the media are unlikely to come to pass. Apocalyptic predictions seem to be a feature of bear market periods -- some experts believe that a spike in doomsaying is a sign that the bottom is nigh, and yes, some people try to track this sort of thing. You and I are best served by shrugging it off.

(If all else fails and you can't escape the feeling that the Second Great Depression is upon us, do remember that even during the original much-ballyhooed Depression, most of the economy recovered after seven years or so. No economic condition is permanent.)

Do be somewhat conservative with new investments -- but do keep investing. I've been saying that this is a great time to pick up dividend-paying blue chips, the kinds of stocks you can hold for decades. I'll totally understand if you want to avoid JPMorgan Chase (NYSE: JPM), Goldman Sachs (NYSE: GS), or Bank of New York Mellon (NYSE: BK) for a while. But I think stocks like Pfizer (NYSE: PFE) and Automatic Data Processing (NYSE: ADP) -- which are both somewhat recession-resistant, pay good dividends, and are likely to be around for the long haul -- are worth a look at these prices, as are beaten-up stalwarts like Starbucks (Nasdaq: SBUX) and American Express (NYSE: AXP), both of which I bought recently.

Do keep contributing to your 401(k), do keep dollar-cost averaging into long-term investments like index funds, and do keep the long term in mind.
The list of don'ts What fun is a list of Dos without a list of Don'ts?

Don't completely bail out of stocks. Dial down your risk level if you must, but remember that market turnarounds tend to be sudden and sharp -- you don't want to be chasing that train when it comes.

At the same time, don't be too aggressive with smaller growth stocks unless the argument for them is really, really compelling -- and takes economic uncertainty into account. Forward earnings projections, never worth putting much faith in, are particularly worthless in the face of an extended period of economic turmoil.

Don't try to rebalance your portfolio right now. I heard an investment advisor on a local radio station suggest rebalancing at the height of the volatility last week. That seems like a bad idea to me. Rebalancing involves selling investments that have gone up and buying more of those that have gone down. In a highly volatile market, that seems likely to be frustrating at best -- and possibly a very bad idea.

Don't hold your employer's stock. This isn't a good idea any time, but it's a particularly bad one now. If your company hits the skids and you get laid off, that's bad, but at least your 401(k) will be OK -- unless it's built around the same company. Diversify your risks, both in your portfolio and with the rest of your finances.

And most importantly ... Don't panic.

Panic leads folks to make all kinds of bad decisions. Now is an excellent time to skip the business section of the paper, turn off CNBC, and go for a walk or something instead. The market's story will unfold whether we're paying attention to it or not.