How to rescue your retirement

2. Don't go too conservative

After this bear market is over, that is. You won't be able to afford the retirement you want if you play it too safe. If you moved all or part of your portfolio into cash before this crisis hit, congratulations. If you can catch the next rally -- right now, Oct. 23 seems a potential start date (see my video "The end of the world -- NOT") -- and then move to more cash, great. But after you've heard the all-clear -- and I'm monitoring the best technicians I know and will pass any signal I get to you -- then you need to take some risk again. Staying in money markets or CDs during the early stage of any recovery will just make catching up harder.

To get the highest returns that you can without loading up on too much risk, you'll need to own stocks, especially small-company and overseas stocks. The historical data show that small-company stocks outperform big-company stocks in the years when a market first starts to recover from a downturn. In 1975, the first up year after the bear market of 1974, big-company stocks returned 37.2%, while small-company stocks returned 52.8%.

Overseas stocks, especially shares in emerging markets, also outperform after a crisis passes. By investing in this sector, you'll also tap into the higher long-term economic growth in the developing economies of the world. The United States may show a long-term growth rate of 2.5%, but China and India could easily show growth of 8% to 10% for the long term.

You can implement this strategy of overweighting these sectors even if your retirement money is locked up in a company 401(k) with relatively few choices. If your company plan doesn't offer a small-company or international fund, start lobbying whoever at your company is in charge of the 401(k). Argue that, by offering so few choices, the company is violating its fiduciary duty to employees.

3. Manage your portfolio more actively

If you're going to take on a little more risk to increase your return, you'll have to learn to play a little defense, too. Maybe that means just mixing stocks and bonds more creatively. The 28.5% return on a mix of 70% stocks and 30% bonds in 1975 would have trailed the 37.2% return on a portfolio of 100% big-company stocks that year, but it would have clearly beaten the 17.3% return for a portfolio of 30% stocks and 70% bonds.

In the bear market of 2000-02, though, a mix of 30% stocks and 70% bonds would have returned a positive 5.1% in 2002, when a portfolio of 100% stocks would have lost 22.1% and a portfolio of 70% stocks and 30% bonds would have lost 10.9%. In most years, I don't think a mix of either 100% stocks or 100% bonds is best for most investors. The point is to try to match the mix of your portfolio to the state of the market.

Again, you can do this with almost any 401(k). This kind of risk management is more than most 401(k) investors are used to, but I think it's a necessary skill for the future. Necessary because many of us have to try for a little extra return on our portfolio after this bear and because I don't think this is the last bear market we'll face. I think the financial markets have become fundamentally more volatile in the past decade, and I think that trend is likely to continue in the next decade.

Most of us will have to work past official retirement. And we'd better start planning for it now. How do you plan for work at 67? By taking care of your health. Investing in exercise to keep yourself as vigorous as long as possible is critical. By spending some money now to make sure your skills keep up with the market so you're not completely unemployable at 67. By building as much flexibility into your life now, when change is relatively easy, so that you won't have to suddenly move to a new town or a new state without any local family for support at 67.

• Video: How to diversify your portfolio

None of this is especially easy. Heck, opening a financial statement is hard these days. And, individually, we're going to need help with some of them. For example, companies, with nudging (gentle or otherwise) from the federal government, are going to have to step up and start offering better retirement planning to go along with their 401(k)s. Active risk management doesn't come easily to most of us, and the companies that make a profit out of running 401(k)s should provide more financial education than they're doing at most companies right now.

And what job will that be?

The biggest need, though, is help on the job front. Our government needs to understand that the solution to the retirement problem is more and better jobs. Everyone I talk to glibly says, "Well, I'll just have to work longer." At what jobs? In an economy in which companies regularly find ways to replace higher-paid older workers with younger employees, most people won't be able to stay at their current jobs. And in an economy that is exporting its meat-and-potatoes manufacturing jobs and their higher wages and generating mostly lower-paying jobs to replace them, post-retirement workers are going to be competing with a horde of anxious younger workers for even ill-paying, no-benefit, part-time work.

We need Washington to wake up and realize that, yes, we need to create jobs to pull us out of the current economic slowdown but we also need to create jobs to fix the holes blown in the retirement plans of tens of millions of Americans by this financial crisis. We need not just jobs now but a coordinated national effort -- public and private -- to create long-term job growth for decades to come.

We also need to find a way to help those people who reach retirement age but who are in no condition to keep working. Working longer isn't a solution for someone who isn't physically or mentally able to work.

Ending the financial crisis may be the first task facing a new president come January. But creating more jobs that pay decent wages should come a close second. Without jobs, we can't possibly work our way -- or our country's way -- out of the hole that we've dug.

Continued: Developments on a past column

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