‘FIVE TIPS FOR REBUILDING YOUR PORTFOLIO,’ from Fidelity Investments. Simple suggestions to consider as you readjust your portfolio to the current financial realities.

In Uncategorized on June 3, 2009 at 13:56

By now many Americans have experienced firsthand the ups and downs that come with investing. True, we’ve all been through a very tough year and it’s nothing to belittle, but history has shown that the markets have a way of coming back. So, instead of letting fear grip you, it may be more prudent to take an active hand in rebuilding your portfolio. Here are five steps you can implement now to help get your savings back on track.

1. Boost your savings rate

Although you have no control over which direction the markets move, you do have complete control over how much you contribute to your workplace savings plan or brokerage and savings accounts.

So, given what’s happened in the markets since last fall, you now need to consider how much more you need to save in order to reach your retirement savings goal. A good way to get a read on your particular situation would be to use one of the many online savings calculators available to you. You might find the Fidelity® myPlan® Retirement Quick Check1 tool a useful starting point for gauging where you are and how much you may need to boost your current savings rate.

If coming up with that increased level of savings seems out of your current reach—and for many it may be—try to do anything you can to bump up your savings rate. If you’re fortunate enough to earn a raise or a bonus this year, consider putting the increase toward your workplace savings plan contribution. If your 401(k) plan has a matching employer contribution, consider optimizing the impact of that benefit by making your contribution equal to or greater than the matching percentage.

“Taking full advantage of a matching employer contribution should be a top priority,” says Bill Hunter, vice president of retirement products in Fidelity’s Personal and Workplace Investing unit. “Otherwise, you’re leaving what is akin to ‘free’ money on the table.”

You may also want to consider opening an individual retirement account (IRA)—either a traditional or a Roth IRA—or contributing to an existing one. Individuals can put away up to $5,000 in one of these accounts for 2009, and those age 50 or over can increase that to as much as $6,000. Catch-up 401(k) plan contributions—up to an additional $5,500 per year—are also permissible in 2009 for participants 50 or over.

2. Tune up your asset mix

Diversification is a time-tested strategy for smoothing out the inevitable swings of the capital markets. An all-your-eggs-in-one-basket investment approach is ill advised for most investors. On the one hand, it can overexpose you to risk, as in the case of a purely equity-based portfolio; on the other, it can result in an overly conservative positioning, as in the example of a concentration in money market funds, which would stand to miss out on the upside growth potential that historically has been evident in equities.

Making drastic shifts away from or toward any one asset class in this volatile market would also be an ill-advised strategy. The chances of successfully “timing” the market—or, in essence, accurately guessing when certain asset classes are going to move one way or the other—are about as likely as finding a leprechaun with a pot of gold at the end of a rainbow.

Asset allocation and diversification make more sense for the average investor. Maintaining a diversified mix of assets in your portfolio—a blend that is appropriate to both your investment time horizon and your overall tolerance for risk—is always a smart option, and there are any number of online tools available to help investors determine what may be most reasonable for them.

If your allocation doesn’t seem quite right at the moment—if you’re too heavily tilted to the equity side for someone of advanced years or too weighty in fixed income for a young investor with a longer retirement horizon—then tuning up your allocation probably makes sense. Transitioning slowly into your new plan is key, though, and you’ll want to take a thoughtful approach.

3. Don’t count out equities

Financial industry research is rife with data illustrating how investors often tend to move at precisely the wrong time—bailing out at the bottom of a market pullback or buying when the market has already peaked. Remember, too, that selling assets that have plummeted in value due to recent market volatility locks in what are now only “paper” losses.

While the stock market has taken its biggest fall in decades, it is often when markets seem least appealing that the best bargains emerge. Recent sell-offs in equities have created what many consider to be excellent buying opportunities, as stock valuations have hit historic lows in many cases.

Dollar cost averaging, or putting a certain dollar amount to work on a regular schedule, means buying more shares of a mutual fund or an individual security when its price per share is lower and fewer shares when its price is higher. “Dollar cost averaging is a way to help realize the market’s returns over long periods,” says Chris Sharpe, co-portfolio manager of the Fidelity Freedom Funds® target retirement date mutual funds. “And it avoids the perils of market timing.” But note that investing in this manner does not ensure a profit or guarantee against a loss in declining markets.

For investors who have a longer retirement time horizon and are looking for greater growth potential over time, investing in the equity asset class has stood the test of time, and now—when there are potential bargains to be had for some—might be a good time to start building or adding to the equity portion of a portfolio.

4. Reduce your investment expenses

Counting strictly on market appreciation to increase the return on your account is not always a winning short-term strategy. A more effective approach is to try to keep your investment costs low—shave a few basis points (or hundredths of a percent) off a mutual fund’s expenses and they get added right back into your investment return.

Many 401(k) plans offer lower-cost investment options. Some provide the choice of investing in index funds—those that seek to replicate the performance of a particular market or industry—and fees tend to be somewhat lower than actively managed mutual funds. Many plans also offer access to special low-cost share classes created expressly for retirement savings vehicles.

All other things being equal, choosing a lower-cost option may not save you a lot in the near term, but over time, because of compounding, you’ll likely notice the difference.

5. Hatch an alternative plan

If you’re having second thoughts about retiring in the next couple of years, there may be better options out there than pawning your grandpa’s gold watch. Since time is not on your side, you may want to consider working longer in your current position and putting off retirement until your nest egg recovers a bit more. Another alternative might be to take on a part-time job after you retire so that you’re not depleting your retirement assets as quickly. Note: If you are currently working in retirement and taking Social Security, your payments may be less. Consult your tax advisor for more information about your specific situation.

The goal, of course, is to try to make your savings last. Sticking to a budget can play a big part in conserving assets. So, too, can making the decision to skip the cost-of-living adjustments you might have given yourself and keeping those assets working for you in their current savings vehicles. And, spending less while your portfolio is still recovering will leave more of an asset base to build upon when the investment environment improves.

When the markets will turn around is still an open question, even with the substantial resources and intellectual energy that have been put toward reigniting the global economy and reinvigorating its capital markets. For our part as investors, careful assessments of current retirement savings, thoughtful choices about how to manage assets going forward, and perhaps some revised thinking about our short-term goals are the active steps we can take now to help get our retirement savings goals back on track.


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