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Reinforce retirement plan now

After last week's market dive, retirees and near-retirees have less time and fewer options to repair the damage.

Consider it a jarring wake-up call.

If the stock market's stumble caught you napping, now is the time to take a close look at your investments, especially if you are on the verge of retirement or already retired.

Younger investors have time on their side. When they retire, the 2000-01 bear market most likely will be a distant memory. Over the next few decades, they should have plenty of opportunity to rebuild their savings.

But older investors do not have the same luxury. To minimize further damage to their battered portfolios, those who do not already have an investment plan need to get one.

"A lot of people are finding out that their risk tolerance is not as high as they thought it was," said Tampa financial planner Douglas P. Hanke of Florida Financial Advisors.

When Nasdaq stocks were on their way up, he said, it was easy for investors to ignore advisers preaching the virtues of diversification. Owning a variety of stock and bond investments smoothes out the market's ups and downs. But investors rarely worry about volatility on the upside. And a diversified portfolio is not going to double in a year or two as many Nasdaq stocks did.

"I've been behind the curve the last five years trying to talk people into the value of a diversified portfolio," Hanke said. "But now they're listening again."

Financial advisers say that what retirees and near-retirees should do now is the same thing they should have been doing all along.

"If you didn't have a good asset allocation program before, now is the time to understand the value and not make the same mistake a second time," said Clearwater financial planner V. Raymond Ferrara of ProVise Management Group. "If you rolled the dice on technology and you continue to roll the dice on any single asset class, eventually you'll lose."

Asset allocation involves getting the right mix of investments based on an investor's objectives and tolerance for risk. It can be as simple as deciding how much of your assets you want in stocks, then putting the stock portion in a stock index mutual fund and the rest in income-generating investments such as Treasury securities and bank certificates of deposit.

What every good asset allocation program avoids is the danger of putting too many eggs in one basket. Investors who have a big percentage of their money in one stock or one sector are living on the edge, as many AT&T Corp. stockholders learned last year to their regret.

St. Petersburg financial planner Robert K. Doyle said investors should ask themselves: Am I too heavy in fixed income? Too heavy in technology? Do I have too much in small caps? Am I too aggressive for my own level of risk tolerance?

Changing an asset allocation can be a gradual or drastic process depending on how far out of whack a portfolio has gotten and whether an investor has short-term or long-term goals. For an investor who is still in the saving years, the simplest way to make a change is to redirect new contributions to those categories that should be increased.

But an older investor with an overly aggressive portfolio may want to make changes now, even if that means selling some stocks at the worst possible time, when prices are depressed.

"If he cannot tolerate another 20 percent decline in his portfolio, he needs to diversify now," said Doyle, a planner with Spoor, Doyle & Associates. "That's the price he has to pay for not planning. You should start planning three or four years before retirement and start peeling back the aggressiveness in your portfolio."

Planner Hanke said he recommends that retired investors who have been too aggressive switch to more conservative stocks but stay in the market.

"I've gotten a few calls from people saying, "Should I go to cash?' and I say, "No,' " he said. "There is still a good chance of living to age 90 or beyond. How are you going to live down the road if you don't have some growth in your portfolio?"

Although few people expect the stock market to bounce back immediately, getting out of the market is dangerous because investors rarely guess correctly when to get back in.

Financial advisers say the stock market's reversal should remind investors that they cannot count on huge investment returns every year to fund their retirements. They say excessive optimism is common among baby boomers projecting early retirements and new retirees who think they can safely withdraw 8 percent to 10 percent of their assets each year.

"People should not be lulled into a false sense of security by whatever projection system they use," said Gregory A. Rosica, a partner with Arthur Andersen in Tampa. "A lot of people want to take more out of their portfolios than they really can."

One problem is that the average returns used in most computer projections do not account for variations in the sequence of returns. Bad years early in retirement can have a huge long-term impact. Many planners suggest a conservative withdrawal rate of 5 percent a year for younger retirees, increasing gradually with age.

Retirees who find the market's drops unnerving might try keeping a larger cash cushion.

Christine Fahlund, senior financial planner for T. Rowe Price Associates in Baltimore, says she recommends keeping cash equal to two years' worth of living expenses after subtracting income from non-investment sources such as Social Security.

"One fellow I suggested that to went ballistic," she said. "He said you should be in the market at all times earning top rates of return. But a lot of people like that peace of mind of plunking something in a money market and knowing it's there."

_ Helen Huntley can be reached at or (727) 893-8230.

Making a bear market bearable

Wondering what to do with your retirement savings in a bear market? Here are three tips:

1. FIND OUT WHAT YOU'VE GOT. Get a good grip on the kinds of investments you own and the level of risk you are taking. If you own mutual funds, be sure you know how the managers invest your money.

2. CHECK YOUR BALANCE. How is your balance of stocks and bonds? Are most of your holdings in a single sector such as tech stocks or utilities? Diversification dramatically reduces risk. If your portfolio is modestly out of whack, make a gradual shift by redirecting new savings. Even if you decide big changes are necessary, do not sell all your stocks at what could be close to a market bottom.

3. ADJUST YOUR EXPECTATIONS. If your retirement dreams depend on a 20 percent annual investment return, it's time for a reality check. More realistic: 10 percent to 11 percent for a stock portfolio, 8 percent for a conservative portfolio of stocks and bonds.

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