With what is going on in the stock market this past week....

[REACTIVATED IN CT]

should I be getting out of all of my domestic and international equity positions in my 401(k) Plan? What should a prudent investor 6 years away from retirement do ?

[A HERETIC I AM]

1. Relax

A review of your allocation by a licensed professional Financial Consultant is probably in order but don't panic because the market has ticked back to where it was in late October. This isn't a recession and a week does not a trend make.

Even this morning, the Dow has gone from being over 50 points down to over 40 in positive territory for the day so far (11:30 ET).

We have been perhaps too used to seeing regular, weekly gains. A little volatility has returned and this is not a bad thing.

[MazeRat7]

2. And then relax some more.... and then after that....

maybe try to decide what is more important to you this year... security vs growth. As for domestic vs international, this year is going to be volatile year for both. I've adjusted my 401K toward large-cap domestic value funds, domestic blended funds, and international growth funds. But I am pretty conservative with my 401k.

As for my option trading... I've got puts on a couple of consumer cyclical names and deep calls on big tech and materials. I'm still waiting for the right re-entry point for the financial and health care industries.



MZr7

[lumberjack_jeff]

3. If your asset allocation makes sense then take the relax advice

Your investments should reflect how far you are from retirement, not so much a reading of the tea leaves.

[Sammy Pepys]

4. Well....

Please note that I am not a financial professional....

How much of your total portfolio is in equities? Being 6 years from retirement, most standard allocation models would probably have you in more conservative fixed and cash investments with a smaller portion in equities, but not making up the majority of your total portfolio. You wouldn't ditch equities completely, but you'd scale down that exposure somewhat. Check with a pro.

[wakemeupwhenitsover]

5. Here's the rule of thumb:

Subtract your age from 100 & invest the resulting number as a percentage of money in growth (equity) stocks.

I've made you fifty years old for this demonstration:

100 - 50 = 50% of your total investment in growth.(If you want to be more aggressive, subtract your age from 120.)

For international funds invest:

20% of your total stocks in international funds (safe) = 10%

25% of your total stocks in international funds (middle of the road) = 12.5%

50% of your total stocks in international funds (aggressive) = 25%

For bonds:

Safe = equals age

Middle = Age less 10

Aggressive = Age less 20

[A HERETIC I AM]

6. "The" rule of thumb? Do you have a link for this rule?

I'm not trying to be acrimonious here but i have never heard of this rule you speak of.

Where did you get this concept from?

Do you honestly think it applies to all investors, even ones we know virtually nothing about?

[wakemeupwhenitsover]

7. I got over a million hits, so here's four. (edited)

You've never heard of the rule? It's certainly not for everyone since all investors have to assess their own risk, but it's been around for years.

http://www.bargaineering.com/articles/stock-allocation-rule-120-minus-age.html

http://www.nber.org/aginghealth/spring06/w11974.html

http://www.investmentu.com/IUEL/2002/20020606.html

http://www.vankampen.com/vksite/news/commentary/seeley0806.asp

Just because I'm fair, here's a link that sneers at the 'rule of thumb':

http://www.dows.com/Publications/ConventionalWisdom.htm

[A HERETIC I AM]

8. Fair enough. Thanks for the links. Interesting reading....

Asset allocation and diversifying across sectors is said to be the most important thing for steady returns. I think you might agree, since everyone is different in how they feel about risk from an emotional point of view, it is important to know where a particular investor falls on a scale of risk aversion with somewhat more detail than a generic rule of thumb.

It is my opinion that this is extremely difficult to do on a public message board.

[wakemeupwhenitsover]

9. That's why it's called a

'rule of thumb', not 'written in concrete'.

I was responding to the OPs concern that she was too heavily invested (& close to retirement) in the market.

[scruffy]

10. I agree . . .It IS very difficult to use a rule of thumb . .

especialy when you don't know anything else about someone. For instance, if someone is 6 years away from retiring, would you reallocate their 401(k) for both existing AND new contributions, or for just the current account value? And what if they are fairly young and won't be using their 401(k) or IRA for several years?

Plus - based on that rule of thumb, I should be much more heavily invested in bonds than I ever would consider being!

[wakemeupwhenitsover]

11. I guess we could rename the forum

"Get a financial planner, preferably one that belongs to the same discussion group".

As far as your comment, "what if they are fairly young...", that's why the 'rule of thumb', not 'written in concrete' says to subtract your age from 100 (or 120 if you're more comfortable with risk).

[scruffy]

12. DId I say "Get a financial planner?"

and even if someone is 50 and retired but not taking $ from a qualified plan until 70, I'm not sure I would have 30% bonds in that IRA. Not a comlaint against a rule of thumb, just an observation.

[wakemeupwhenitsover]

13. You wouldn't & I wouldn't, but the OP

asked what a 'prudent' investor would do & specifically mentioned that s/he is 6 years away from retirement. I took it to mean that the fluctuations are making him/her nervous. Reallocating funds into a more 'prudent' (meaning risk-adverse) line might be more comfortable. And I would hope that no one would try to convince him to take more risk than he's comfortable with. He has to sleep at night. I take ambien. :rofl:

[scruffy]

14. You know . . .

I don't think anyone is trying to convince him/her to take any more risk than they are comfortable with. I think the original question was whether the recent events should indicate to someone that they should pull out of the market . .. to which I would have to say NO. However, for someone that close to retiring, an overall review of their allocations would certainly make sense.

So I think we're all probably saying the same thing. Maybe we debate this stuff too much.

Does ambien make you sleepwalk and eat everything in the kitchen? :)