(Money Magazine) -- I'm 55 and invest conservatively in my 401(k). The market seems to be on a rebound, though, so should I consider being more aggressive? -- Bob, Richmond, Ind.
Your question reminded me of a New Yorker cartoon that shows an office worker who appears a bit shaken up being comforted by colleagues and saying "Really, I'm fine. It was just a fleeting sense of purpose -- I'm sure it will pass." That's the impression I get from many people today when it comes to investing.
The greater concern for risk that investors young and old acquired during the market meltdown -- as evidenced by surveys from T.D. Ameritrade as well as from the Investment Company Institute and Merrill Lynch -- seems to be waning as the Dow crosses the 12,000 mark and the fear and anxiety wrought by the financial crisis recedes.
The people who were consistently pulling billions of dollars out of domestic stock funds after the crash have now reversed course, pouring nearly $12 billion into U.S. equity funds in the last four weeks alone.
With stocks gaining more than 15% last year and the market up more than 90% from its trough in March 2009, the attitude seems to have shifted from hunkering down to hopping on the bandwagon.
I'm not suggesting that people should remain fearful and invest as if another cataclysm lies just around the corner. But we also have to be careful that we don't go to the other extreme and invest like it's 1999 (or 2007) now that the market is humming again.
In short, a little equanimity, a sense of balance and proportion, is in order here. Successful investing, particular for long-term goals like retirement, isn't a matter of constantly angling to capitalize on shifting market conditions.
It's setting a strategy you can stick with through all types of markets and then doing just that -- sticking with it. If you let your emotions or the mood of other investors dictate your investing strategy, you'll wind up investing too aggressively when the market is on a roll and then swinging to an overly conservative stance after it's taken a beating.
That pendulum approach is a recipe for poor long-term performance, as it increases your chances of buying in at increasingly higher prices and then selling after the air is let out of those inflated prices.
You'll be buying high and selling low, the opposite of what you want to do. So to get back to your question: Should you get more aggressive? Well, if you really pulled back and shifted all or nearly all of your 401(k) accounts to cash or bonds, then I suppose the answer is yes.
You don't want to continue along that path. But the goal here isn't to tailor a new go-go strategy based on what you think the market might do over the next year (or, more likely, based on what's done over the past year).
Rather, the idea is to chart a sustainable course by setting an asset allocation that provides a decent trade off between a shot at long-term gains and sufficient protection from market setbacks.
Aside from periodic rebalancing and gradually shifting more of your portfolio to bonds and cash as you near and then enter retirement, you want to resist the urge to fiddle with that stocks-bonds mix.
There are a number of ways to arrive at an allocation that makes sense for you. You can check out Morningstar's Asset Allocator tool or you can use the allocations in the Vanguard or T. Rowe Price target-date funds designed for someone your age as a guide. (I mention these firm's funds specifically since they both appear in our MONEY 70 list of recommended mutual funds and ETFs.)
And while you're at it, go to a tool like T. Rowe Price's Retirement Income Calculator and plug in your 401(k) balance and other info to see how different stock-bonds mixes affect the amount of annual income you can draw from your savings without too big a risk of outliving your money.
But remember, the point is to create an investing strategy that you can stay with in up and down markets. That way you don't have to engage in a guessing game of overhauling your portfolio every time the market changes direction.
Bottom line: I think it's good that people are shaking off the trepidation (and in some cases paralysis) that has gripped them over the past couple of years. But let's also retain an appreciation for just how volatile and unpredictable stocks can be -- and factor that understanding into our investing.
|Overnight Avg Rate||Latest||Change||Last Week|
|30 yr fixed||3.80%||3.88%|
|15 yr fixed||3.20%||3.23%|
|30 yr refi||3.82%||3.93%|
|15 yr refi||3.20%||3.23%|
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