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Cotto: Don't time the market
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August 23, 2000: 11:18 a.m. ET
Guest on chat series advises retirement investors to look long term
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NEW YORK (CNNfn) - The biggest mistake people make with retirement planning is assuming that the U.S. stock market will always deliver stellar returns, a Merrill Lynch expert told a chat audience on CNNfn.com this week.
James Cotto, senior financial consultant and vice president at Merrill Lynch, answered questions Tuesday as part of a weeklong chat series in CNNfn.com's special report, The Road to Riches.
Cotto advises people on retirement plans, investing assets, budgeting money, college planning, estate planning issues and lending questions.
Here is an edited transcript of Cotto's session. (Note: CNN staffers asked some questions.)
Chat moderator: Welcome, James Cotto, to CNNfn.
James Cotto: Good afternoon, everybody. Hopefully, I'll be able to address any of your issues and questions.
Question: With no interest rate rise and an apparent stability in the economy, do you think the market might take off again in a frenzy like it did last fall, or do profits finally matter?
Cotto: Well, we do believe that. Merrill Lynch believes that if interest rates are not being raised today or in October, we will see a downward trend in the interest-rate cycle over the next 18 months. And that should benefit all markets -- equities, as well as fixed-income securities.
Click here for the full lineup of chat guests.
As to whether to time the market, I believe it would be best if you stuck with an investment discipline and an asset-allocation strategy for the long term. History shows that this type of investing will be the most beneficial.
Chat moderator: What is the biggest mistake people make with their retirement savings?
Cotto: The biggest mistake would be not realizing that though the S&P 500 has given a return of approximately 28 percent over the last five years, over the last 80 years, the return has been closer to 13 percent.
And you should be using long-term historical numbers instead of short-term numbers when allocating your assets.
Question: So people should just keep investing on a regular basis, whether the market is up or down?
Cotto: People should structure a portfolio with a mixture of equities, bonds, and cash, and stick to that discipline on a systematic basis. This will be the best way to achieve your long-term objective.
Question: What advice would you give a "Gen Xer" who is just starting to think about planning for retirement?
Cotto: Well, one choice would be to realize that growth in a retirement vehicle, whether it is in a 401(k) or individual retirement account (IRA), is at a tax-deferred basis. So if you can afford to reduce your cash flow, it would be the best way to have money there for you when you retire.
Chat moderator: What is a "Roth IRA?" How is it better than a regular IRA?
Cotto: A Roth IRA is a retirement vehicle where the assets come out after the age of 59-1/2 - tax-free versus tax-deferred. A regular IRA, when the money is removed, is taxed as ordinary income. There are certain restrictions as to who can qualify to have a Roth IRA. And they are specifically based on your annual income.
Question: What kinds of things can you invest your retirement funds in safely and still have good growth?
Cotto: I think to diversify your assets. What one can do is to use mutual funds as an investment vehicle. You will have the capability of multiple choices and diversification.
Chat moderator: How can one know whether it is beneficial to liquidate an IRA and take the tax hit, then invest in a Roth IRA?
Cotto: That would be something to be best discussed with your tax adviser, who knows your total tax situation.
Question: At what age should people start cutting back on the risk of their investments for retirement?
Cotto: Well, that is based on what your retirement objectives are, if the amount of risk you are incurring in your retirement vehicle is based on the lifestyle that you are planning on living upon your retirement, not just the risk you are willing to take in your investments.
Chat moderator: If someone has a 401(k) at work and is contributing enough to get the match, but not the maximum allowed under the law, should he max out his 401(k) first or open an IRA?
Cotto: The 401(k) has features that an IRA does not have. One of them would be borrowing against it. If this is a benefit to you -- for instance, if you wanted to be a first-time homebuyer -- this may be one option that you may like to have and would probably still continue to invest in the 401(k).
Chat moderator: Under what circumstances is it OK to borrow from a 401(k)?
Cotto: Each 401(k) plan has its specific criteria. You would have to consult with your Human-Resource Department, although examples of things that you may be able to borrow for would be college, a home purchase and health issues.
Chat moderator: What are some tax-favorable instances where it would be OK to withdraw from the 401(k) without paying it back?
Cotto: Well, to withdraw without penalty, you would have to wait to the age of 59-1/2. One reason you would start to draw on your 401(k) is that you are retiring. Your taxable income will be reduced. Thus, the monies you withdraw from your 401(k) will be taxed as ordinary income, but may be at a lower tax rate.
Question: If a person only has a profit-sharing plan at work and not a 401(k), contributes $2,000 a year to a Roth IRA, and still wants to invest money for retirement, which is the next best vehicle to do this?
Cotto: To answer that question, the issue is whether you would want these monies to go tax-deferred or tax-free. And would you like to have these assets available to you now, or are you willing to tie up these assets until age 59-1/2?
I think that these issues must be addressed by you and your adviser before making the decision of which investment vehicle to use.
Question: I'm 27 and I have a long way before retirement. I would like to know if you think that income taxes will be higher in 33 years or lower?
Cotto: Unfortunately, I don't believe I have a crystal ball, and I can't comment either way.
Chat moderator: Do you have any final thoughts for our audience?
Cotto: I think that, as an investor, you should always be looking to invest for the long term. Spending time in the market is always better than timing the market. History shows that if you take a long-term objective, the chances are you're going to realize your investment objective.
If you are a business owner and are looking to determine if a retirement plan is good for you and which plan would be good for you, there is a Web site put out by the Department of Labor called selectaretirementplan.org. This Web site, I believe, would give the business owner three chapters that would give him helpful tools and facts to determine if he should set up a retirement plan, and which would be best for the employer as well as the employees.
Chat moderator: Thank you very much, James Cotto, for joining us today!
James Cotto: Thank you very much. Everybody have a great day.
Cotto joined the Retirement chat series via telephone from Mt. Kisco, N.Y. CNNfn provided a typist for Mr. Cotto.
* Disclaimer 
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