Market Timing: Not a Good Retirement Strategy

I’ve been working for five years now and save religiously for retirement. But I feel that I’ve begun investing at a bad time for the markets. Most of all I worry about what will happen to my 401(k) if the market tanks again. Am I right to be concerned? — Aaron, Nashville, Tenn.

It would be nice if I could assure you that the market gyrations that have spooked investors recently and over the past dozen years — i.e., stock prices dropping by 50% or more in 2000 and 2007 — aren’t likely to occur again. But I can’t do that.

If anything, recent research shows that these sorts of gut-wrenching episodes — while not exactly the norm — are likely to occur more frequently than we previously believed. So I can virtually assure you that over the course of your career, the market will tank many times.

But I don’t think that’s something you should worry about when you’re investing for retirement. Investors have gone through many tough times before.

Since 1929, we’ve had 14 recessions and 13 bear markets, an average of about one of each every six or so years. And each time stock prices eventually recovered from these setbacks and climbed to new highs. I see no reason for that dynamic to change.

Besides, as counterintuitive as it may seem, you may actually be better off starting to invest in a lousy market if you’re just beginning to save for a retirement that’s many years down the road.

Related: What is an index fund?

A T. Rowe Price study from a few years ago examined how four hypothetical retirement investors who put their savings into a diversified portfolio of stocks would have fared over four different 30-year periods depending on whether they began investing on the eve of a bull market or a bear market.

I’ll spare you the details, but the upshot is that the investors who got their start in a bear market accumulated more than twice as much in savings as those who began investing on the verge of a bull. The reason: the shares that investors acquired at depressed prices during a setback soared in value as the market rebounded, significantly boosting the eventual size of their nest egg.

Of course, neither you nor I really know whether this is, as you fear, “a bad time for the markets.” Bear and bull markets are easy to identify in hindsight, but difficult to impossible to predict in advance. If that weren’t the case, everyone would get out of the market just before it drops precipitously and jump back in just as prices are rebounding.

So it makes little sense to try to time your retirement saving and investing based on what you think the market may or may not do. The most you can do is play the cards you’re dealt as best you can.

As a practical matter, that means investing most of your retirement savings — say, 70% to 90% — in stocks at the beginning of your career when you have plenty of time to recover from those inevitable market downturns. As you get older, you can begin shifting more of your savings to bonds.

You can expand beyond a simple stocks-bonds portfolio if you like. But don’t feel you have to load up on all the gimmicky little niche investments Wall Street’s marketing machine churns out. In general, a simpler mix is better.

Related: What is the right mix of stocks and bonds for me?

By the time you’re ready to retire — and more interested in protecting your nest egg than growing it — you probably want to have roughly 50% of your savings in stocks and 50% in bonds. For a guide of how to achieve this transition, you can check out the “glide path” of a target-date retirement fund. After you’ve retired, you can then shift your focus on the best way to turn your savings into retirement income.

But however worrisome you may feel the outlook for the economy and the markets may seem today, what with the constant talk of the fiscal cliff at home and the debt crisis abroad, you would be making a big mistake if you let your anxiety sidetrack you from continuing to save diligently for retirement and putting 401(k) money into the investment that’s generated the highest long-term returns in the past and is likely to do so in the future — stocks.


Investment Advisers See Some Bright Spots

Nearly 60% of independent advisers think a double-dip recession is unlikely over the next six months, and more than 60% expect the S&P to increase in the same period, according to a survey released recently by Charles Schwab.

But don’t go betting the farm on these optimistic findings just yet. A look at the results from January’s survey of advisers shows that they aren’t necessarily the best augurs. In that earlier survey, 49% of advisers expected inflation to increase in the next six months (it hasn’t); 47% expected consumer spending to increase (it hasn’t); and 40% expected unemployment to increase (it hasn’t). Advisers did get some things right, though. In the January survey, 59% expected consumer savings to increase in the next six months (it did); and 46% thought the housing market would continue to soften (it has).

Schwab acknowledges that the survey has limited forecasting value. “We’re thinking [the study] is more like a national view of what’s going on,” says Bernie Clark, executive vice president for Charles Schwab Advisor Services. “It’s not a predictor as much as where we think that the trends are taking us.”

And what looks like the dominant trend these days? The biggest challenge facing advisers and their clients right now, Clark says, is what he calls the “uncertainty factor.” About half of advisers’ clients feel less optimistic about the economy than they did in 2009. Forty percent of advisers say their clients are less optimistic about their investment performance than they were six months ago, and 50% of advisers say their clients feel less confident they’ll be able to retire when they want to. Advisers report that 47% of clients are reducing expenses, and more than half are spending less on discretionary items.

Advisers have their own doubts, too. Seventy-one percent say it will be difficult to achieve their clients’ financial goals. That’s down from the 84% who held that opinion in early 2009, but up from the 58% who expressed these doubts earlier this year.

In any case, people are increasingly turning to independent advisers for help with financial planning. More than 9 in 10 advisers said they received new assets in the past six months.

For the record, the sector of the market that advisers think will perform the strongest over the next six months is information technology, cited by 47% of them. Of course, if you have your doubts about advisers’ predictive powers (see above), maybe you’d also like to know the sector in which they have the least confidence. And that’s consumer discretionary—the pick of only 9% of professionals. Check back in six months to judge their accuracy.

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