NEW YORK (CNN/Money) -
The market was on fire on Friday but the gains hardly make up for a lackluster third quarter, which was a sea of red ink.
Despite the recent move higher, there's still a lot of uncertainty hanging over the markets. Soaring oil prices, the presidential election and violence in Iraq may have some investors unsure about where to park their retirement dollars.
How can you deal with a tough market and still come out on top? Here are today's 5 Tips?
1. Don't disengage.
In tough market times, some investors may reason that there are better things to do with their money than put it in a shrinking portfolio.
But if you stop contributing to your 401(k) you're making a huge mistake, says Stuart Ritter, a Certified Financial Planner at T. Rowe Price. "When there's little appreciation out there, you have be the one to build up your nest egg."
That's not all. Very often you're getting a company match, which is basically free money! Don't give that up.
Also, because you're making pre-tax contributions, it's like getting 20 to 30 percent more in your 401(k). Here's the reasoning behind that argument: If your company gives you $100, in all likelihood you have to pay about 25 percent to the federal government and another 5 percent or so in state taxes. Then you're only left with $70 to invest for your retirement. But if you had that money put directly into your 401(k), you'd get the whole $100.
If you stop building your nest egg, you may also fall into the habit of spending more and saving less. That could make it harder to get back into an investing frame of mind when market conditions improve.
2. Resist the urge to do an extreme makeover.
The important thing to remember is that you're in this for the long haul.
Ritter advises against making wholesale changes to your portfolio -- especially ones that are emotionally motivated. He says investment decisions that aren't based on a goal or strategy won't serve you well in the end.
In order to be successful at timing the market you have to be right a lot and history has shown that individual investors don't do well. "The odds that you'll make the right bets and the right times consistently are pretty low."
CNNfn's Gerri Willis shares five tips on how to fix your 401(k) in this uncertain market.|
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Lori Lucas, Director of Participant Research at Hewitt Associates, a global human resource and consulting firm, says another mistake people often make is looking at a well-performing investment as their salvation. And then, they get in too deep. Even if it's your own company's stock, Lucas warns against being too concentrated in any stock.
3. Pick real winners.
If you do decide (calmly and rationally) to re-evaluate what's in your 401(k), and you find you're really not happy with your choices, you may want to tweak your holdings.
When you're looking for new funds, you'll want to make sure that the ones you're considering have a solid track record compared to funds in the same category. In other words, compare small cap funds with other small cap funds; international funds with other international funds.
The easiest way to make these comparisons? Go www.morningstar.com and check out their fund reports. Look for funds with above-average performance for the past three to five years, rather than last year's winners.
If you're picking funds for the first time, consider using index funds to cut your costs. A large cap index fund is a good way to start, and then you can fill in with international, small cap and bond funds.
If you find the options in your 401(k) are poor for one of the asset classes you want to invest in, you can always pick a fund you like and invest in it through a Roth IRA.
And don't forget, if you're already holding individual stocks, try to sidestep funds with heavy investments in any one company. One way to find out what's in your funds is by using Morningstar's X-Ray tool.
4. Don't fear bonds.
Because we're in a rising rate environment, investors may be fearful of investing in bond funds. But the right ones do have a place in your portfolio right now.
Certified financial planner Dee Lee recommends looking into short-term bond funds, and she's not alone. Christine Benz of Morningstar agrees. Her picks in this category include Fidelity Short-Term Bond (FSHBX: Research, Estimates) and Vanguard Short-Term Bond Index (VBISX: Research, Estimates) and Vanguard Short-Term Investment Grade (VFSTX: Research, Estimates). For investors who prefer to take on a little less risk, she recommends Fidelity UltraShort Bond (FUSFX: Research, Estimates), Payden Limited Maturity (PYLMX: Research, Estimates).
5. Put your retirement on autopilot.
If you're too pressed for time to sweat the right adjustments in your 401(k), you might want to consider target maturity funds.
These funds are actively managed and adjust as investors get closer to retirement. They start out aggressive early on and get progressively more conservative as the investor ages.
As you shop for these funds though, take care to check fees, as some can be high. And many of these funds are new, so long-term track records are rare.
Benz recommends the T. Rowe Price series (the T. Rowe Price 2010, 2020 and up to 2040). "Fidelity and Vanguard offer similar investments and they're also worth looking into."
Lucas says 55 percent of plans surveyed by Hewitt offer them. She says these are intended to be a "turnkey" solution for investors who don't want to sweat over asset allocation or worry about rebalancing their portfolio. These funds are intended to be the core fund, if not the only fund in your 401(k).
Gerri Willis is a personal finance editor for CNN Business News. Willis also hosts CNNfn's Open House, weekdays from Noon to 12:30 p.m. (ET). E-mail comments to firstname.lastname@example.org.