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Clients keep asking me if there is a silver lining beneath the market turmoil and believe it or not there is not one, but two. Just as the sky high gas prices forced us all to rethink our driving habits and our daily trips, the dramatic downturn in the market has forced us all to rethink our spending habits. Who among us isn’t holding off on expensive vacations and the latest gadgets? And it’s a good thing. By putting the brakes on our excessiveness, we will all be better off by not abusing credit cards and subsequently having more money to save and invest.

As for the other second silver lining, it too represents a major opportunity. Due to the emotional panic that led to a stunning sell-off, there is a rare opportunity to buy into the market at prices we haven’t seen in many years. This is especially pertinent to those with 401k’s.

I am happy to see that in spite of unsettling times, most Americans have continued to invest in their 401k retirement plans through payroll deductions. Now although the existing assets have shrunk in value, the good news is that the newest assets are benefiting from having been bought at substantial discounts, allowing investors to accrue substantially more shares. The question is what is the best allocation advice for these changing times?

I believe that the most important thing you could do right now is to hold tight and stay committed to the long term goal of building your retirement nest egg. Furthermore, this is a good time to consider whether or not you can refocus your allocation. By that I mean you should be concentrating more of your asset mix in the sectors that have the greatest potential for recovery.

The consensus seems to be that the large blue chips and multinationals have the greatest chance to bounce back. Among those that have been more resilient are durable goods and health care. In addition, large dividend paying companies have been the strongest performers during market down turns.

Conversely, financials have been the hardest hit and many of the large players in this sector would seem to have the bumpiest ride towards a full out recovery. With credit markets tight and small companies and upstarts struggling to find capital for expansion, this might not be a good time to have a lot of your assets averaging into these sectors.

As we approach the new year, and say good-bye to one of our most challenging in recent past, it is important to focus on the positives and try to plan for better times. Use this last month to study the list of investment choices on your plan menu and to create a strategy that puts greater emphasis on investments that offer the best possible chance for recovery.

What I Know That You Need To

Q. Is there an asset allocation you would recommend if I am in my mid-thirties?

A. Generally someone this young should try to take advantage of the market low and have more than two thirds of their portfolio committed to equities. I would commit more than half of this allocation to large U.S. companies. Another portion should go into large global companies, and a smaller amount in both sectors which include real estate, health, utilities and technology.

Q. How should I allocate my investments if I am within five years of retirement?

A. This depends upon how soon after you retire that you’ll be drawing income from these assets, but lets assume for the moment that your 401k would be your primary source of income in retirement. If that is the case, you need to keep at least half of your investments in low risk fixed and treasury type investment allocations so that it is out of the market during volatile periods such as this. The other half should be invested in the most conservative large company investment categories that your plan might offer. The one big change, however, is that you should consider investing your new assets differently than you have in the past so that you can take advantage of the market down turn and the low prices. This will allow you to buy more shares which will hopefully result in incremental growth at retirement.

Q. My company stock is available in my 401k. How much I should allocate to this?

A. The rule of thumb is because any particular company could be subject to market conditions, it is recommended that employees not invest more than 15 to 20% of their retirement money in the company itself. This is due to the fact that in addition to their 401k, employees may also be compensated with company stock options and other investments in the company over the span of a career. You never want to have all your retirement eggs in one basket.

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Tags: 401k, certified financial planning, cfp, financial planning, lee rosenberg, long term investments, retirement

About the Author: Lee Rosenberg is the Co-founder of ARS Financial Services, Inc. As a Certified Financial Planner with more than 34 years of solid financial expertise. Lee is a registered representative of Cadaret, Grant & Co., Inc. He was also named one of the top 25 Independent Financial Advisers in the US by Rep magazine.

This entry was posted on Thursday, December 4th, 2008 at 9:10 am and is filed under 401k. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.