Playing It Safe, Missing the Deal of a Lifetime?

Like most of us, the investor below is worried about the status of her retirement accounts given the depressed state of the markets and the economy. She made a move she thinks will keep her safe during these turbulent times. But in reality she could be missing the opportunity of a lifetime.

Question: I am a lucky one, in that my job should be secure during these troubled times. I invest 3 percent of my wages in a deferred compensation plan (no employer match). I just stopped contributing to the mix of mutual funds they are in now and had all of my future contributions re-allocated to the stable income fund. I left the existing balances in the current mix of stocks funds they are in now (foreign, large cap, mid cap and small cap, with a small amount in a bond fund and a small amount in the stable income fund.) Was this wise for the time-being? It doesn't seem like the market will rebound any time soon.

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Also, I have a separate Roth IRA account that has been in the toilet for years. I moved it from Schwab to Smith Barney about a year ago. It's in a mix of American funds and other funds through Smith Barney.

I have no idea what I should, or should not, be doing in this market. I am 49 years old, and will probably work until I am 66. I also have a pension where I work. My husband is self-employed; we have rental property he manages. His retirement accounts are minor. We have two boys, ages 6 and 10. Thanks. --B.R., Geneva, N.Y.

You're right, B.R. It sounds as if you are among the lucky ones as we cope with the current financial turmoil. I hope your good fortune continues.

But based on the information you have provided, I'd consider taking a different approach to the deferred compensation plan you participate in through work. Rather than dump all future contributions into the stable-income fund, I'd go back to contributing to a mix of the available stock, bond and stable income funds.

The reason is you're missing out on an opportunity to invest at low prices.

Low Prices, More Shares

Depending upon the fund in question, share prices are down about 30 percent from this time last year. That means a mutual fund that a year ago sold for $50 a share is now selling for $35 a share.

Therefore, every $50 you contributed to that fund last year bought one share. Today, it would buy you 1.43 shares. When the rebound happens, those extra shares means you benefit in a big way.

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You might be right, the market may not recover anytime soon. However, according to the plans you laid out, you have 17 years left in the work force. And if you wait until the market rebounds to invest in stock and bond funds, then you've missed out on the early gains.

If you wait for that hypothetical mutual fund above to return to $50 a share before investing again, then you missed out on the first 43 percent worth of gains. I know right now it seems like investing in a stock mutual fund seems like throwing money down a hole, but now is the ideal time to invest.

Yes, stock and bond prices can continue to decline this year. But with 17 years left in the work place, you have plenty of time to ride out the current storm.

That stable-income fund has a place in your retirement portfolio, acting as a stabilizer in times like these. A stable-income fund is a conservative investment vehicle usually found in retirement plans that seeks to preserve principal and deliver higher returns than you would earn with a money market mutual fund.

Stable income or stable value funds are a good choice for cash holdings if you have access to one; however, they're not the place to park all of your retirement funds if you're 17 years out from retirement. Over the long term, that stable-income fund is not going to provide the kinds of returns needed to help you stay ahead of inflation and accumulate the nest egg you will need for retirement.

One of the best ways for every investor to recover from the investment markets collapse is to step up their investing through a deferred compensation plan like a 401(k), 403(b) or other employer-sponsored retirement plan.

In fact, I would suggest you actually step up your contributions to that deferred compensation plan from that 3 percent level. Even with your qualification for traditional pension plan, a 3 percent contribution is probably not sufficient.

If you feel you can't make a big jump now, bump the contribution up 1 percentage point now and then promise yourself to increase it one more percentage point every six months until you're in the 10 to 15 percent neighborhood. This gradual approach helps you adjust to the smaller take-home amount in each check.

Among the other issues you bring up, you mention your uncertainty about what moves to take and the transfer of your Roth IRA to Smith Barney. Start the search for help by talking to your Smith Barney broker.

By investing through a full-service brokerage firm like Smith Barney, you're paying for advice through the commissions and mutual fund fees you are assessed. Just keep in mind how that broker is compensated as it could influence his or her recommendations. If you're not getting advice helpful for your situation, then there's no reason to be paying those fees and you should look to a low-cost brokerage firm and possibly find a fee-only financial adviser.

Finally, you mention your husband is self-employed but has little saved for his own retirement. That is something that should be corrected. Even if you qualify for a pension and own bountiful retirement accounts, there should be retirement savings in his name as well. No man or woman should rely entirely on their spouse for their retirement security. Remember: Life happens and we must be prepared.

Also, as a self-employed individual, he's missing out on one of the prime advantages of business ownership. That is the opportunity to sock away more money for retirement than those who work for an employer and, as a result, save a significant amount on taxes.

As I'm sure you know, business owners get whacked by paying double on Social Security and Medicare taxes. The best way to mitigate that impact is to contribute to a retirement plan designed for small businesses as SEP IRA, SIMPLE IRA and solo 401(k) accounts. Take a look; it will be worth the time and could keep your good fortune running for many years to come.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com.

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