Keep your 401(k) in stocks
graphic October 22, 2001: 7:48 a.m. ET

You've moved your 401(k) out of stocks. Now what?
By Jean Sherman Chatzky
graphic graphic
NEW YORK (CNNmoney) - Geri Dechant, 57, and her husband Clem, 62, recent retirees living outside Denver, hung in there as long as they could. For the past seven years, they'd kept nearly all of Clem's 401(k) in a diversified mix of stocks. They rode the market up and watched the portfolio double and, in early 2000, hit the mid six figures. That's when they decided to cash it in.

But when their investment adviser suggested that they were better off sticking with stocks, they acquiesced, only to watch the portfolio deteriorate. Not this time. Shortly after the Sept. 11 attacks on the World Trade Center and the Pentagon, the Dechants called their adviser again. This time they put every last dollar into government bonds.

"We just couldn't take it anymore," Geri says.

  graphic THE THREE 'RS' OF 401(K) INVESTING  
  • Rethink
  • Rebalance
  • Rebuild
    They were far from alone. On the day the markets reopened, 401(k) investors moved money out of stocks and into safer havens in record numbers, according to Hewitt Associates, which tracks the 401(k) assets of 1.5 million investors in 40 corporations.

    Part of this was pent-up demand from the four days the market was closed. But not all.

    By week's end, investors had 61.5 percent of their assets in equities, a sharp drop from the 71.5 percent they'd had-on average-since Hewitt began running these numbers in 1997. Some 401(k) watchers were surprised. Plan participants didn't dramatically reduce their exposure to equities after the Asian financial crisis in '97. Or after the collapse of Long Term Capital Management in '98.

    But Ted Benna, who invented the 401(k) in 1981 and now runs the 401(k) Association, said this time is different. In the past, "most participants viewed a bear market as a two-week or two-month event. Our confidence hasn't been shaken like this."

    Special report: The 401(k) turns 20

    So what's a 401(k) investor who's sold stocks to do now? Rethink. You may be tempted to flee the equity coop, but try to resist those impulses.

    "The time to sell is not after the market has already dropped by 25 percent," cautions Dallas Salisbury, CEO of the Employee Benefits research Institute. "Take a look at your time horizon," he says. "If you've got five years or more, you ought to be able to weather this storm."

    Rebalance. For the past several years, rebalancing meant selling stocks that had appreciated dramatically and buying bonds, guaranteed investment contracts or other fixed-income alternatives. Today, because of the precipitous drops in stock prices, it probably means selling bonds and buying stocks.

    "Emotionally, that's going to be tough to do," Benna acknowledges. "But it's the smart thing to do."

    Check your mutual funds

    Rebuild your positions. If you moved money to cash and are wondering when -- and how -- to get back into the market, think about doing it gradually, starting now.

    "We're spooning money into the market now instead of dumping it in," says Minnesota financial adviser Ross Levin, who suggests splitting your funds into six or 12 chunks and dollar-cost averaging into the market on a monthly basis.

    "I think ultimately, the sooner you get back in there, the better you'll be in the long term," he says.

    Even Geri Dechant and her husband plan to return. Just not yet. "We'll probably miss the beginning of the upswing," she says. "But that's a chance we're willing to take."

    When should you get back in the market? Now, but do it drop by drop. graphic

    * Disclaimer

    graphic graphic