Recouping Losses is a Balancing Act by Carrie Schwab Pomerantz on Creators.com

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Recouping Losses is a Balancing Act

Dear Carrie: I'm 49 and have about $200K in a 401(k). I will get a pension. I did have almost $260K in my 401(k) and got whacked in 2008. Where should I invest to catch up after the loss I took? Also, how would I allocate between my traditional 401(k) and Roth 401(k)? — A Reader

Dear Reader: This is a great and timely question because (unfortunately!) so many people are in the same situation. And your attitude is right on — keep saving and investing in your retirement accounts. Suffering losses can stop some investors in their tracks, but now is the time when you need to double your efforts and re-evaluate your strategy. So kudos for your proactive approach.

In terms of making up for losses, it's not so much about what you're specifically invested in as how you invest. The more aggressive you are (which usually means investing in stocks), the more likely you are to realize higher returns over time. But as you've experienced, this may also translate into more volatility along the way.

So while time is a major factor here, your own feelings about risk are even more important. That's because (and I'm sure you've heard it before) the key to long-term investing success is to find an approach you can live with, even when times are rough.

START WITH HOW MUCH RISK IS RIGHT FOR YOU

One of the worst things you could do now is take on more risk than is comfortable. On the other hand, if you invest too conservatively, you risk falling short of your goals. So before considering specific investments, I'd review your current asset allocation and make sure it has the right balance of risk and return for you.

You obviously want some growth in your portfolio. At the same time, having lived through one of the most severe recessions in history and suffered losses, I'm assuming you also want to protect what's left, which could mean taking a more conservative approach. Be mindful, however, that if you choose to invest conservatively, you should plan to save more aggressively.

Let's take a look at three model portfolios, just as examples:

— Conservative — This portfolio includes 20 percent stocks, 50 percent fixed income and 30 percent cash. Looking at returns from 1970 to 2008, the average annual return was 8.2 percent, with the best year being 22.8 percent and the worst negative 4.6 percent.

— Moderate — This portfolio includes 60 percent stocks, 35 percent fixed income and 5 percent cash. Average annual return for the time period was 9.5 percent, with the best being 30.9 percent and the worst negative 20.9 percent.

— Moderate Aggressive — This portfolio includes 80 percent stocks, 15 percent fixed income and 5 percent cash.

Average annual return for the time period was 9.7 percent, with the best being 34.4 percent and the worst negative 29.5 percent.

How do you feel about these figures? Is there a combination that you could stick with during both up and down markets? How do these compare with your current portfolio?

ADD IN THE TIME FACTOR

At 49, you still have a relatively longtime horizon — time to save and invest more — not only to recoup some of your losses but also to build enough resources for a comfortable retirement. So, long-term thinking should be an important part of your investing decisions.

Here's an interesting history lesson. From 1926 to 2008, the S&P 500 Index has never had a 20-year period with a negative return. During that time, if you compare the best and worst return figures of a diversified equity portfolio for a one-year period (54.1 percent/ negative 43.3 percent) and a 10-year period (20.1 percent/ negative 1.4 percent), you see that the odds are strongly in your favor over the long term. The important takeaway here is that by holding stocks longer, you can potentially reduce your downside risk.

But once again, while stocks may offer more upside potential, what you invest in is really a matter of finding the right mix — one that gives you growth potential and lets you sleep at night.

SOME THOUGHTS ABOUT ROTH

Allocating savings between a traditional and a Roth 401(k) also involves some long-term thinking. Contributing to your Roth 401(k) makes sense if you think your tax bracket will be the same or higher in retirement. Given today's relatively low tax brackets, that might be a smart guess. Also, the balance from a Roth 401(k) could be rolled over directly into a regular Roth IRA when you leave your employer.

A traditional 401(k) might be a better choice if you think you'll be in a lower tax bracket when you retire. And at your age, you may be at the top of your earning power and could benefit more by taking a tax deduction now.

One way to hedge against the unknown is to split your contributions between the two. Currently, you can contribute a maximum of $16,500 per year. At 50, you can make an additional yearly $5,500 catch-up contribution.

Whatever you decide, make continuing to save a top priority. No matter how or where you invest, consistent saving is still the surest path to a more comfortable retirement.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER (tm) is president of the Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.