Protecting your portfolio

Marketplace Staff Mar 9, 2007

TESS VIGELAND: If you’re closing in on a goal you’ve been saving and investing for — maybe retirement or your kid’s college education — consider the roller-coaster stock markets of the past two weeks a wake-up call. Not so long ago many folks getting ready to spend their savings got caught in a market slump and paid a heavy price. Wanna know how bad it feels? Marketplace’s Steve Tripoli re-visited some of those folks, and their lessons for you.

STEVE TRIPOLI: Let’s visit the Marketplace archives from September 3rd, 2002. A nasty stock-market slump was clobbering a suburban Boston dentist named Jim Bodkin.

OLD STORY SEGMENT: On a gloomy late-summer day the pouring rain outside sets the mood as much as the turned-down corners of Jim Bodkin’s mouth. His stock market losses really hurt.

JIM BODKIN: My savings probably are down 35-40 percent. That’s my retirement. So I guess I’ll be working a little longer.”

If retirement was imminent, why didn’t the Bodkins move some money to investments with a shorter-term horizon than stocks, as most financial planners advise?
Like a lot of other people, they just ran with the Wall Street bulls.

BODKIN: You know the stock market was booming and I just felt like so many people in the 90’s that the stock market was just going up going up and I wasn’t ready to balance my portfolio and put it into fixed income and bonds.

Other investors we visited back then had it worse. One retired accountant had to un-retire. He and his wife both worked four extra years.

Back in 2002, financial planner Stan Steinberg told us many Americans had been kidding themselves about their investing sophistication.

STAN STEINBERG: I think people felt that they could be excellent stock pickers, didn’t understand about integrating the elements of a portfolio, were not clear on how to diversify well. But it felt great, and people made money. Nobody knew when to get off.”

Today that’s also your lesson: know when to get off. Markets have been up in recent years, but good markets aren’t good teachers. Unfortunately investors tend to learn more from periods of pain.

But you don’t have to. Independent financial planner Jim Pinney says advance planning’s key when you’re nearing a goal. He says you need to know going in what percent of your investments you’ll be spending every year.

JIM PANNEY: And the higher that percentage draw is the more you are at risk to a falling portfolio.

So, if you’re planning to spend it all fairly quickly, like with college savings, you want as little risk as possible as the time draws near. That means few volatile investments like stocks.

The idea’s the same for retirement but it’s trickier. Unlike college savings you don’t know for how long you’ll need to tap that money or how markets will perform during those years.

So Pinney gives his retirement clients this warning:

PINNEY: The larger the percentage of your income is coming from invested assets the more you are going to be forced to cut back by a falling stock market.

Unless you take precautions.

The more you take from savings, the less your exposure to stocks should be. That means that if you need more than one or two percent of your savings each year to supplement Social Security and pensions, cut back on stocks.

Jim Bodkin, our shell-shocked investor from five years ago, says today that he’s backed off stocks big time since being burned.

BODKIN: I felt for our needs, that annuities were the way to go.

The trauma of their losses got Jim and his wife focused on what they wanted most from their money – a secure stream of income.

Annuities promise that but they’re costly. After all, in exchange for that income guarantee you’re paying an insurer to take on risks you don’t want.

But the Bodkins get something in return.

BODKIN: I don’t worry anymore. I really don’t.

The volatility of the last two weeks is only a small taste of what stock markets can dish up. So don’t get caught in the next plunging market if your time horizon’s short.

I’m Steve Tripoli for Marketplace.

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