July 13, 2008

A Bear Market is No Time for Midcourse Corrections

By Jerri Stroud, St. Louis Post-Dispatch

Jul. 13--If the bear market has done a number on your portfolio, you may be tempted to make a midcourse correction.

Most investment professionals say that could be a costly mistake.

Bert Schweizer III, principal and senior investment adviser at Buckingham Asset Management in Clayton, says that more damage can be done by trying to react to fears about the market than the market can do on its own.

An investment plan that's well thought out anticipates declines and protects against them by including a variety of investments including stocks, bonds, real estate and perhaps commodities. "Without having that road map, you're subject to making detours all along the way," he said.

Maurice Quiroga, managing director with National City's private client group in Clayton, says his staff is fielding clients' questions and reviewing their portfolios to make sure they reflect the clients' risk tolerance. "Some want to do it daily or weekly -- some monthly," he said.

Quiroga says it doesn't hurt to review an investment plan from time to time, particularly if there has been a change in the client's lifestyle or needs. Perhaps a spouse has lost a job or a child is about to go away to college. If the client is getting close to retirement, she may want to reduce her risks.

"We're encouraging investors to remain focused on the long-term view, which is critical for building wealth," Quiroga said.

Clif Helbert, retirement planning principal at Edward Jones, says a recent survey by the Des Peres-based brokerage shows that $4-a-gallon gasoline is prompting more than half of Americans to reduce their retirement savings. Low-income and minority households are hit especially hard.

"We're very sympathetic to people feeling it in the pocketbook right now," Helbert said. "We're trying to make sure they don't overreact and jeopardize their retirement 20 years down the road."

Lisa Van Cleve, a partner and expert in employee benefits and compensation at law firm Bryan Cave LLP in St. Louis, says tough economic times tend to generate more mistakes, whether in taxable investment accounts or in retirement accounts such as 401(k) plans.

Media reports of market volatility can prompt people to check their accounts too often, inspiring knee-jerk reactions. Van Cleve advises employees to check their retirement accounts infrequently -- mostly to make sure their money is safe and appropriately invested.

Investors who choose to sell stocks in a down market and move their money to conservative investments like certificates of deposit are almost guaranteeing that their portfolio will under-perform, the advisers say.


Christine Fahlund, senior financial planner for T. Rowe Price Funds in Baltimore, said moving to cash or fixed-income investments from stocks "will help free your mind for now, but it's not going to work." Clients need to own stocks if they want their portfolio to beat the inflation rate over the long term.

Investors will be selling stocks low, and when they decide to reinvest in the markets, they'll be buying high. "The better wisdom is to have a well-diversified portfolio," Fahlund said.

Fahlund is sympathetic to investors who have seen their retirement portfolios shrink and who worry that inflation will erode the buying power of their income. She understands that working people are discouraged when losses seem to overwhelm the new money they're putting into their 401(k) plans.

"We've been working on ways to make people feel more optimistic," she said. "The key word for all pre-retirees is to remain flexible in your plans," Fahlund said. Those who have a fixed retirement date in mind may find it difficult to retire in a bear market.


"If you don't have to retire and your portfolio is way down, don't retire," Fahlund said. By continuing to work, you can keep saving and delay taking money out of your portfolio.

However, delaying retirement doesn't necessarily mean that you have to put off some of the things you'd planned to do in retirement, she said. "You can delay the date, but not the gratification," she said.

For example, people who had been thinking of going on a cruise or buying equipment for a retirement hobby could go ahead with those plans but remain on the job for a while longer. They can continue to save, but perhaps save a little less and buy some things they enjoy.

"You kind of get the best of both worlds," Fahlund said. For every year you delay your retirement, the amount you will draw in Social Security increases and the money in your retirement fund has more time to grow. You also get to enjoy life a bit more.

For those who already are retired, it may be time to review the amount they're withdrawing from their portfolios, Fahlund says. If they're taking out more than the portfolio's yearly growth, they're more likely to run out of money.

Retirees may find it hard to cut their fixed expenses, Fahlund says. However, delaying major purchases could help them reduce withdrawals. "You don't want to be exacerbating a bad situation," she said.


Kortney Christensen, director of life-event services at Wachovia Securities in St. Louis, says the investors who do best in the current environment are those with the discipline to stick with a mix of stocks, bonds and other investments that matches their risk tolerance and needs for growth.

A downturn can change that mix, but it also can be an opportunity. Some investments are bargains now. If you're contributing to a retirement plan or making regular taxable investments, "you're buying things cheaply relative to where they were four or five years ago," Christensen said.

The downturn also may be a good time to rebalance a portfolio, Christensen says. If a client has highly appreciated stock that he or she wants to sell, the gain on the sale should be lower, and the tax on gains will be less.

However, if investors decide to sell stock that's declined in value, they should realize that they could be locking in a loss, especially if they move their money to a vehicle that's less likely to grow, says Shannon Moenkhaus, senior vice president of Enterprise Bank & Trust in Clayton.

Moenkhaus says a market decline rams home the need for investors to keep a reserve of emergency money they can use if the unexpected happens. That way, they won't have to sell part of their portfolio to raise funds.

A bear market is especially challenging for investors who want to move to more conservative investments because they expect to retire within five years, she says.

"It can be hard to turn the ship," she said. If investors are able to save new money, they could use it to invest in fixed income investments as a safety net rather than selling what they have, she says.

Schweizer says he's spending a lot of time checking in with clients and reassuring them that their plans are sound and that the bear market will end -- although he's not sure when.

"Capitalism is a phenomenal system, and it works," Schweizer said. "Staying the course is a much better course than trying to respond to the market."

[email protected] -- 314-340-8384


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