Keep Steady Stock Portfolio Amid Crisis

N E W   Y O R K, Oct. 9, 2001 -- After the third quarter stock market battering, investors might be tempted to cut their 401(k) account losses and put what's left of their nest eggs under their mattress.

But Good Morning America's financial contributor Mellody Hobson said investors should remember that retirement is the most long-term investment goal they will have. They can take comfort in knowing that all investors are in the same fix.

"I would recommend making very few changes to your portfolio given the recent economic backlash resulting from the tragedy," Hobson told Good Morning America. "Stay in stocks. Since 1926, stocks have consistently proven to be the best investment over the long-term. Your retirement funds are too important to move into cash and low-yielding bond funds."

Buy on the Way Down

Hobson suggested buying stocks while prices are low.

"None of us can predict when the market will hit its bottom, so the trick is to keep your wits about you and buy on the way down," said Hobson, who is president of Ariel Capital Management in Chicago. "It might be a good time to sock away more money into your 401(k) plan each month. If you buy quality stocks at their situational lows, they are bound to recover over the long-term."

Many shaken 401(k) investors are moving their assets to more conservative investments, such as money market accounts, but this could be to their detriment over the long-term, Hobson said.

According to a study conducted by the Employee Benefit Research Institute and the Investment Company Institute, the average 401(k) account was worth $58,774 at the end of the year in 2000, prior to 2001's disappointing year-to-date performance.

Making Up For Losses

Hobson used this average 401(k) account figure to explain how the current bear market impacts some average investors.

Here is one example: At the end of 2000, a 40-year-old man who had contributed $250 a month to his 401(k) plan with a balance of $58,000 would have $936,494 in 25 years when he cashed out his retirement portfolio. (Assuming a 10 percent average annual total return.) But, as of Sept. 30, the S&P 500 Index was down 20.39 percent for 2001, bringing the average 401(k) account balance down from $58,000 to $46,174.

But the investor can make up the money that he has lost in the market this year. That same 40-year-old man with 25 years left to invest would have to step up his contributions $103.98 per month, to $353.98, (about $26 per week from his paycheck before taxes) to have the same ending balance of $936,494 in 25 years. (Again, assuming a 10 percent average annual total return).

"That means making some small sacrifices, maybe cutting out the daily latte and muffin or foregoing taxis and taking the bus, or cutting back on weekend entertainment a bit," Hobson said.

If this same man were to get nervous and move all his money to a very safe money market fund, which has typically averaged a 3.8 percent return, he would have only $240,788 after 25 years, assuming he put away $250 a month into the money market fund.

Younger Investors Better Off

Hobson's next example was a 25-year-old woman with 40 years left to invest before cashing out her retirement portfolio. She estimated that the woman would have an average 401 (k) balance of $6,000 by the end of 2000.

Before 2001's stock market drop, if the woman contributed $100 a month to her 401(k) plan with a balance of $6,000 she would have had $826,490 in 40 years when she cashes out her retirement portfolio. (Assuming a 10 percent average annual total return.)

As of Sept. 30, 2001, that account balance would have slipped from $6,000 to $4,777. But the young investor has time on her side, with 40 years left to invest. She would only have to step up her contributions by $9.98 a month, to $109.98, to have the same ending balance of $826,490 in 40 years. (Assuming a 10 percent average annual total return, Hobson added.)

That extra money she's putting into her 401(k) plan is income before taxes, Hobson said. If this same woman were to get spooked and move all her money to cash, she'd have only $131,812 in 40 years, assuming she still contributes $100 a month and her cash yields 3.8 percent.

Stock up On Values

Hobson again said that investors should consider buying the worst performing stocks, those that fell in value after the Sept. 11 terrorist attacks.

"The contrary investor, the person who has real courage, is the one who often makes the most money because they follow the often quoted mantra — 'buy low and sell high'," Hobson said. Those who bought shares in insurance stocks following the stock market's reopening on Sept. 17 would have made a tidy sum, she said.

Insurance company Aon Corporation, for example closed at $36.25, and was down 1.25 percent on Sept. 17. On Oct. 8, it closed at $42.53 and was up 17.32 percent since Sept. 17, and up a total of 15.85 percent since Sept. 10, before the World Trade Center and Pentagon attacks. Another insurance company, AIG, saw its stock go down 4 percent on the first day after trading reopened, but since Sept. 10 it is up more than 3 percent.

Which Stocks are Bulletproof?

But Hobson says investors should be careful about investing the airlines, which were unstable even before the attacks.

"In the very recent past the airlines have been plagued by labor issues, including costly strikes and threats of strikes — fuel costs, high capital costs and expenditures," Hobson said. United Airlines, for example was down 43.22 percent on Sept. 17, closing at $17.50. On Oct. 8, it closed at $18.34, up 4.8 percent since Sept. 17. But overall the stocks have gone down 40.49 percent since before the attacks.

Instead of airline stocks, consider investing in train stocks or even television manufacturers, she said.

Since Sept. 11, defense industry stock has been a big winner, Hobson said. For example, aeronautics manufacturer Lockheed Martin stock closed at $43.95 on Sept. 17, up 14.69 percent. It closed at $49.11 on Oct. 8, up 11.74 percent. And since Sept. 10, the stock has gone up 28.16 percent.

Another example is Raytheon, which makes Patriot missiles, among other defense weapons. Its stock is up 46 percent since Sept. 10. Somewhat surprisingly, cell phone stock has also gone up. Sprint's stock, for example is up more than 20 percent.