6 smart 401(k) moves for rough times

By Tim Middleton

Whenever the stock market tumbles, novice investors begin to squeal. They forget the scuffed knees they got when they learned to ride a bike; they think every spill in this arena is a fatal crash.

The pain would be bad enough if investing didn't determine your personal bottom line. But, in today's pensionless world, it does. You're going to ride your 401(k) throughout your retirement. You've got to learn how.

Former President Franklin D. Roosevelt offered excellent advice to a nation gripped by far worse problems in 1933: "The only thing we have to fear is fear itself." Even bear markets of historic proportions end, and when they do, markets quickly come back. Those timid souls who gave up on the market in 2002 have given up profits of nearly 50% since -- and that's even after our current malaise.

What you're afraid of is the unknown. But bad markets are very well known. Generations of investors have endured them and learned from them. The dumbest investing mistakes are also the most common, and smart solutions to them are instantly available. Here are six of those mistakes and their antidotes.

Keeping saving

DUMB: Stop contributing to your 401(k) plan because you're "losing money." In fact, notes Jill B. Boynton of Cornerstone Financial Planning in Newington, N.H., "you are adding to your investments at lower and lower prices, thus lowering your average cost basis."

Everything goes on sale. Stock sales are called corrections or bear markets, but what they are is sales. Markets always come back -- always. The price can be 20%, 30% or even 40% off, but it's still good merchandise.

SMART: Buy the ugliest stuff on the shelf. When any asset is getting beaten up, it will decline relative to others. Keep your portfolio in balance by shifting new money to categories that have fallen below the percentage gain called for in your long-term portfolio plan.

"The market changes all the time. Your long-term asset allocation and goals should not," says Frank C. Boucher, an investment adviser in Reston, Va.

Adam J. Leavitt, with Disciplined Investments in Tulsa, Okla., notes that many 401(k) Web sites have a "rebalance" button that will automate this process of restoring balance between expensive funds and cheap ones. Buying the seemingly worst possible choices "forces you to buy low," he says.

Think long term

DUMB: Dumping your "disappointing" funds for those with better recent results. "This is the classic investor mistake of chasing returns," says Lori L. Embrey of Fairfield Investments and Wealth Management in Columbus, Ohio.

Lately the small-cap value style of investing has gotten walloped, even though over long periods it is among the best-performing styles. For months, commodities like petroleum and gold defied the bad market for stocks, but nothing lasts forever; recently, gold fell 10% in just a few days. Never sell anything simply because it declines in price.

SMART: Even great mutual funds can be expected to underperform in as many as three years of every 10. Assuming the same management team is running the fund in the same way it was when you became attracted to the fund in the first place, stick with it. What Wall Street calls "reversion to the mean" predicts that hot asset classes will cool and cool ones will heat up again.

Look for new opportunities

DUMB: Rejecting investing because today's returns are less than they were in the 1990s. Instead of the double-digit gains back then, the stock market has been delivering annualized returns of about 3.5% in this decade.

Brian Pon, an adviser with San Francisco-based Financial Connections Group, turns that argument on its head. "If you're expecting lower rates of return going forward, you should be increasing your savings," he advises.

And you should be looking in new places for future returns.

SMART: Look ahead for investment opportunities, not behind. For example, U.S. bonds are unsteady, but others overseas are not. "Look for a nice global bond fund," suggests David E. Zumbusch of Sportsmen Dream Financial in Buffalo, Minn. Until very recently, foreign bonds were hard for U.S. investors to own, but now there's even an exchange-traded fund, SPDR Lehman International Treasury Bond (BWX, news, msgs). And while stocks are down in double digits this year, that ETF is up 5.4% as of March 24.

Continued: Escaping a 401(k) the right way

 1 | 2 | next >