You've been avoiding your quarterly statements for months. You've been dumping them in a folder without a glance, so you don't really know how your retirement assets are faring. But now you're closing in on retirement, and you really have to know. So you rip open the latest report and study it. The grim truth is just as bad as you suspected: Your retirement accounts have taken a beating, all right, and now it really matters, because you can't retire unless you have enough to live on. So just how bad is it?
If your retirement account was allocated in the "classic" mix with 40 percent of your money in long-term government bonds and 60 percent in the S&P 500 stock index, you're down something like 8 percent so far this year through October and about 18 percent since the high point for that index in August 2000, not counting the money you may have contributed along the way. If you were fully invested in stocks, you're down about 40 percent since August 2000, and if you were invested heavily in growth stocks during this time, the news could be much worse.
Many people now find themselves in a very different position than they expected to be back when they were using the growth assumptions that prevailed just a few years ago for retirement planning. Some find that although they did very well for many years, their accounts have backtracked to the point where they were three to five years ago. Others realize now that by keeping their heads in the sand over the past three years (didn't that used to be the once-venerated "buy and hold" philosophy?) they sustained heavy losses and simply can't retire as planned. So what can they do now? Although there can be no one-size-fits-all advice, there are some principles that you can keep in mind as you try to focus your efforts and begin the work of repair.
Take a hard look at fees you're paying. One principle you can rely on is that while market returns are always uncertain, fees, like death and taxes, are not. There's no reason to pay sales loads on mutual funds, or hold mutual funds that charge high management fees. Review the management fees you're paying on any insurance policies and annuities as well.
A look at the SEC's Web site summarizing types of investor complaints by year shows, surprisingly, that the number of investor complaints during the 2002 fiscal year was about the same as last year, and about the same as 1998, when the markets were flying. However, there's been a marked increase in the proportion of those complaints that concern fees, commissions, and administrative costs.
We have no hard evidence whether fees are becoming more oppressive than they already are. However, people become more conscious of the weight of those fees when they see their annual returns go from a 20 percent rise to a 20 percent drop. No regulation sets the boundary between an appropriate fee and an oppressive one, but there is no reason to pay sales commissions on mutual funds in your IRA, and annual management fees should generally be below 1 percent for equity funds, and considerably lower than that for bond funds and money-market funds.
Clean house. Make a real effort to consolidate your bank accounts, insurance policies, brokerage accounts, and mutual-fund families. Summarize it all on a one-page spreadsheet where you can see at a glance the basic outline of all your major holdings. You should be able to fit a year's worth of all your current statements in one tabbed notebook.
Re-evaluate your personal spending and investing goals. If you find that your retirement account is indeed down substantially from where you had planned it would be at this time, some simple steps are available to strengthen your position. You need to do some combination of the following: Start saving more money, postpone your retirement, and adjust your postretirement spending plans. In some situations, people may find that it no longer makes sense to have life insurance, and that long-term care insurance makes more sense instead. Being a few years older and having less assets than you did just a few years ago obliges you to be more conservative.
Don't let your losses make you vulnerable to snake-oil peddlers. Retirees may be especially at risk. Once you retire, you may of course roll your 403(b) plan into a self-directed IRA. New retirees are likely to find themselves being pursued by any number of ambitious scam artists. These are often various types of sales people, usually financial planners or insurance agents who offer seemingly irresistible returns.
A recent article in the November 25 issue of Business Week cited the following as the three most common types of scams: Someone offers to sell you bonds for unregistered companies; these may be companies with the weakest financial positions or even companies that do not exist. Another type involves investment schemes promising extraordinary gains for your money because the funds are supposedly invested overseas and thereby avoid taxes. A third type of scam is when you are offered shares of various leasing schemes. The buyers (victims) are told that they are purchasing shares in the profits of leasing operations for such things as ATMs and pay phones, but they aren't really buying anything except tropical travel and other luxuries for the con artist.
The red flags in these cases are the same as always in investing: promises of high returns at low risk, requests for large deposits, investment structures that seem overly complicated, and pressure from salespeople. Remember that no investment is so compelling that you "must" get in on it. Investments are like planes leaving the airport. There are always more. There are no"guaranteed" returns, and for a higher return you should generally expect a higher risk. Two well-designed Web sites that help identify scams are the North American Securities Administrators Association page on how to spot a con artist and the National Consumer League's site on telemarketing fraud tips. You might also check out the Web site for the attorney general in your state.
The hardest question facing you is this: Do you dump all your "losers" in favor of a radically more conservative investment posture?
One option is to admit that things are never going to be as they were, get rid of the investments that have lost the most, and hunker down with the most conservative investments, such as inflation-protected bonds, money-market funds, and CD's. Alternatively, you could decide that better times must be ahead and jump back into the markets in hopes of rapidly recouping.
The trouble is that as you read through newsletters and advice columns, you can readily find various articles lined up on both sides of this question, some saying it's time to cut your losses and face the fact that stocks aren't going to return 20 percent a year, and others telling you that shifting to a conservative position now is exactly the wrong thing to do. The more you puzzle over this dilemma, the harder it gets.
With the profusion of conflicting advice, I can easily make a good case for either view. Talking to your friends at parties will also yield wildly conflicting views. You'll run into someone who seems certain that we are tottering on the brink of a massive global depression, and someone else who is convinced that this is a rare opportunity to get back in the market now that so many people have been scared away. Such people seem to know everything except the fact that they may be wrong.
You will also come across advice columns that, intending to be comforting, say things like, "in 9 out of 10 years when the market was down by X percent, it bounced back by at least Y percent the next year." This type of analysis is really of little value in predicting market moves. While such observations may be true of the past, there's little statistical proof to assure that whatever relationship caused that combination of events to occur once is likely to cause it to recur now. It amounts to not much more than drawing the bull's eye on the target after the arrows have been shot.
The plain fact is that no power exists that is going to enable you to integrate all these conflicting views, and so you are left trying to position yourself in the manner that is broadly correct considering your age and personal situation, knowing that you will not have the information you would need to make a strong bet on market timing. The right investment posture involves moderation and broad diversification, not looking for some masterstroke.
Far more useful are the long-term returns to various investment classes, which do demonstrate some stability. These show the range of returns, the long-term averages, and the kinds of long-term risks that you can expect from different types of investments. However, now that you are nearer retirement, the fact that, say, large growth stocks have had a mean annual return of 11.5 percent from 1928 to 2001 may be of less significance than the range of returns that we have observed. Large growth stocks have had very good decades and very weak ones, varying all the way from 17.9 percent annual returns in the 1950s to 3.6 percent in the 1970s. This wide variation naturally has considerably greater significance for an investor in his 60s than for one in his 30s.
Don't beat yourself up too badly. Researchers tell us about the amazing power of the pain of regret in shaping decisions, but temper that with the good news: You've probably already been through the worst and you're still on your feet. For people around retirement age, the fact remains that they enjoyed a boom during their working careers that is still the wonder of the age. That warhorse 60/40 allocation is still up 24 percent for the past five years, 150 percent for 10 years, and a great deal more over still longer periods.
A final word of advice: If you haven't already done it, seek competent advice about your investments.
