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Market storms needn't wash away retirement dreams

It's easy to weather the storm if you're 30 or 40 or 50, but it gets harder as you get older.

A two-day stock market rebound may be all that many younger investors need to put the carnage of the past couple of weeks behind them. But, if you are a senior who is retired or is nearing retirement, it may take more than a few good days to help you get over the stock market's nerve-wracking gyrations and worries about the prospect of a prolonged downturn.

"If you're 35 years old and still putting in significant contributions to your nest egg, there's a bright side to market declines because you're buying stocks cheaper," says Michael Martin, president of Financial Advantage, a financial-planning firm in Columbia, Md. "When you're retired and not earning new money, there's only a dark side."

Nor does it necessarily help one's spirits to be reminded that time heals the wounds of even a stiff market correction. "It's irrefutably true that over the long term, stocks return more than bonds," Martin says. "The question is, what's a long time to you?"

The last thing older people should do when the market takes a dive is panic and sell stocks pell-mell. In fact, there is every reason to be in the market for the rest of your life. Someone who is 65 years old today may well live another 20 years or more, a time horizon that calls for the inflation-beating growth the stock market can provide over the long term.

In the short term, however, the stock market can be mighty bumpy. So older investors should make a special effort to protect their portfolios against downdrafts, financial planners say. The market's bounce-backs may provide an opportunity to protect yourself against the next slide and begin positioning yourself for a more comfortable ride in the years ahead.

The goal is to find a happy balance between your need for long-term growth and current income and your ability to sleep at night.

Many older people still tend to be overly cautious in their investing strategies. Martin recalls a 65-year-old doctor who had his entire $2-million nest egg in a handful of bank savings accounts. But some financial planners say they have seen a growing number of older people invest heavily in stocks during the market's dizzying climb of the past few years.

Lewis J. Altfest, a financial planner in New York, says he has seen older investors plowing money into everything from aggressive growth funds to tiny technology companies. "They're seeing friends with stocks that have quadrupled," Altfest says. "They feel they've missed out."

Like younger investors, many older investors have come to expect double-digit returns from their stock investments. But they need to be confident that their retirement plans could weather an extended market downturn, says James E. Wilson, a financial planner in Columbia, S.C.

"Even if on average they could get 10 percent a year," which is about what stocks have returned over the past seven decades, "we could have a long period where they don't have the average and they may not have a long enough life span to make that average work," Wilson says.

So what do you do right now? First, resist the urge to dump good companies just because they got hammered when the market plunged. You might have to take a painful hit to sell shares that really do belong in your portfolio for the long term, Altfest says.

On the other hand, it might not be a bad time to get rid of some of those speculative, "whisper-in-your-ear" stocks that you never should have bought, he says.

Investors who need to sell some stocks to raise cash may find that the market drop has provided some good candidates. For instance, many older investors have several stocks they inherited that they have wanted to sell but haven't because of the huge capital-gains tax liability.

Now may be a good time to get rid of them, especially if you can offset gains against any losses you may be taking, Wilson says. You might also consider selling stocks in your individual retirement account, where you won't be subject to a capital gains tax should you make a profit, Martin says.

In general, while there is a place for individual stocks in a portfolio, if you are forced to choose between selling an individual stock and a mutual fund, you are probably better off selling the stock, Martin says. A portfolio crammed with too many stocks often ends up poorly diversified.

Older investors also should use this opportunity to make sure they have the proper balance of stocks, bonds and cash. If a cash crunch forces you to sell stocks, it may be because you lack a proper portfolio of bonds to provide a steady stream of income.

Edward Gelardin, 62, a psychiatrist in Tucson, Ariz., had his entire portfolio in stocks during the 1987 crash. He now has 50 percent in stocks, 40 percent in bonds and 10 percent in cash. The new mix gives him more confidence to weather a market downturn and declines in dividends. "If there's less income from stocks, at least my income hasn't dropped so severely," Gelardin says.

Many planners suggest a "laddered" bond portfolio _ one that uses bonds of varying maturities to reduce risk and ensure that you will have cash when you need it. "You always have money coming in every couple of years, so you don't have to raid your stocks when the market is down," says Bert Whitehead, president of Cambridge Associates, a financial planning firm in Franklin, Mich.

Whitehead recently structured a $250,000 Treasury portfolio for an investor in his 60s: He suggested $50,000 in one-year bills, $50,000 in three-year notes, $50,000 in five-year notes, $50,000 in seven-year notes and $50,000 in 10-year notes.

If you need to sell any bonds before they mature, look first to those at the short and long ends of your bond portfolio, Altfest says. Long-term bonds are "the most vulnerable to inflation if it picks up," he notes, while short-term bonds offer returns that "aren't that great anyway." Unless your goals have changed, you probably shouldn't change the overall mix of stocks, bonds and cash in your portfolio by more than 10 percent.

That means you will still need to keep putting money in the market. If you're newly retired and just got a big lump-sum distribution from your company retirement plan, you may be facing a dilemma. You know you should put the money in the market because you have a time horizon of 20 years or more, but you are afraid you might make a huge investment the day before the next market plunge.

Martin Jaffe, chief operating officer of Wood, Struthers & Winthrop, the investment management subsidiary of Donaldson, Lufkin & Jenrette Inc. with $5-billion in assets under management, says nervous investors might put 10 percent in stocks and the rest in a laddered portfolio of Treasury or high-quality municipal bonds maturing in each of the next seven years. Each time you get an interest payment, invest it in stocks.

As the bonds come due, roll the money into new seven-year bonds to maintain the ladder. Assuming the bond portfolio has an average coupon, or interest payment, of 6 percent and stocks produce an annual return of 8 percent, you would have more than 25 percent of your portfolio in stocks at the end of three years, Jaffe says.

Of course, not all older investors are biting their nails over the market's rocky ride. Gelardin says he couldn't help but see the dramatic headlines in the newspaper, but on most days he doesn't know whether the market's up or down.

"Given my goals, there's no reason to get caught up in the drama," he says.