University Record Intern
Even though the stock market has taken a pounding in recent months, experts say the 24,000 U-M faculty and staff members who have their retirement funds tied up in stocks are better off taking the time to reevaluate their portfolios than making any drastic changes.
In the long run, the economy of the world looks healthy, says Gautam Kaul, the John C. and Sally S. Morley Professor of Finance at the U-M Business School. I dont think this is anywhere close to the [1930s or 1970s].
However, for many investors, especially those nearing retirement, the short run doesnt look good. Many faculty and staff members have been opening quarterly statements only to find large chunks of retirement money have disappeared.
The downswing does affect people when they get their statement. They look at it and say, Im losing money! says Tom Harty, a senior retirement counselor at Fidelity.
Both Fidelity and TIAA-CREF, U-Ms primary retirement investment provider, have seen a substantial rise in the number of investors seeking their services.
The people I most frequently talk to are pre-retirees within 10 years of retirement, Harty says.
It is definitely a concern, says Fernando Ortiz, a senior retirement counselor for TIAA-CREF. If they have a lifetime annuity, the drop could result in lower monthly income.
While the monthly statements are worrisome, Kaul warns against making drastic changes to portfolios in an attempt to prevent further losses.
If you want to take your money out of the stock market but still want a high return, there is a conflict. You cannot do it. If you put it in the bank, you can forget about growth, he says.
Kauls advice is to think long-term.
In the long run, riskier things give you more return. Dont try to make money in the short run, especially for retirement, he says. You are not withdrawing all the money tomorrow.
Kaul says the stock market is an indicator of how optimistic people are about the future. The market hits rough times when peoples positive expectations of the future are not fulfilled and earnings are lower than expected.
The current slump has another culprit Americans have never experienced before, experts say. With the recent bankruptcies and scandals surrounding companies like Enron and WorldCom, investors must decide whether to trust the accuracy of company earnings reports.
If it is true that every company has indulged in falsifying earnings, there will be a significant effect. However, people are leaning towards believing most companies are honest, that Enron and WorldCom are exceptions, Kaul says. Therefore, there has been a temporary shock, but it is not a fundamental issue.
For now, most plan participants are not making major changes to their accounts, Harty says. Instead, investors are taking the time to reevaluate their portfolios.
People nearing retirement should consider three things when evaluating their portfolios, experts say: time frame, risk factor and income need.
The longer the horizon is until retirement, the less people have to worry about, Kaul says. He says investors with 15 to 20 years before retirement should not be too concerned about the current decline, while those nearing retirement may need to look more closely at how much risk they are comfortable with and how much income they need.
Life span must be taken into consideration when discussing time frame. People are living longer than ever, often surviving for decades after retirement.
As the market recovers, benefit payments can recover as well, Ortiz says.
An investors risk tolerance often is tested when the market turns sour. This causes some investors to turn to alternatives such as bonds, which are safer but historically have lower returns, experts say.
If someone wants to get away from it completely, that shows their risk tolerance is low, Kaul says.
Our approach is not to make changes based on current market activity, but rather to assess how a person is invested in terms of risk, Ortiz says. We recommend investors have exposure to all asset classes. The only difference would be the proportion.
|TIAA-CREF consultants will
be available in the Administrative Services Building all day today (Aug.
12), Aug. 13-14, as well as the morning of Aug. 16. Investors can discuss
their portfolios, retirement savings goals, risk tolerance, financial planning
and retirement planning. For a one-on-one consultation time, call (800)
TIAA-CREF also is offering financial education seminars at the following places and times: Pierpont Commons from 10:30-11:30 a.m. Aug. 15; the Medical Science II Building, room 3817, from 2-3 p.m. Aug 15; at Wolverine Tower, Suite 18, from 10-11 a.m. and from 2 to 3 p.m. Aug. 21. To register, go to www.tiaa-cref.org/moc or call (800) 842-2044, ext. 1409.
For example, aggressive investors with a long time before retirement might have 80 percent of their portfolios in the stock market, whereas more conservative investors nearing retirement might choose 30 percent.
Regardless of the proportion, having a diverse portfolio is a smart idea, Kaul says.
Dont put all your eggs in one basket, or stocks in one sector, he says.
Investors also need to figure out what kind of standard of living they are used to and what kind they want in the future. Those nearing retirement who leave their investments in the stock market cannot count on having a certain return in the near future, Kaul says.
If they want money five years from now, they will have to face the consequences and adjust consumption accordingly, or crank up their savings, he says.
Taking these three factors into consideration, investors can create personalized portfolios that are ideal for them, experts say. Even so, there is no way to avoid the unpredictability of the stock market, which is exactly how it should be, Kaul says.
When markets are fair and competitive, no one person should be able to tell what is going to happen in the future, he says. Everyone should want such a market, because then no one person has an unfair advantage.