Investors standing pat, which could leave them out of style

Despite the market downturn, investors keep slugging the meter on their retirement plans.

That's supposed to be "good news," but underlying the stay-the-course mentality is either a stubbornness or inertia that could be hazardous to wealth.

It's not that experts are suggesting ordinary investors ought to stop kicking funds into the retirement kitty or that they should completely overhaul the investment strategy.

It's that investors can't ignore the last few years of volatility, as well as a decade where the broad market has been flat to down, when picking the proper investment strategy for their retirement savings.

Hewitt Associates released a study showing that, despite record losses in 401(k) accounts in 2008, savings and investing habits barely changed at all.

The firm's annual Universe Benchmarks study showed a median loss of more than 28 percent in 2008, dropping the median 401(k) plan balance from $79,600 in 2007 to $57,200 by the end of '08.

Despite that experience, the vast majority of workers continued to save in their plans, and at roughly the same rate. That said, the Hewitt study showed that just under one in five workers made any trade in their 401(k) in 2008.

Fidelity's findings

Fidelity Investments didn't do a survey, but instead relied on actual behavior of the 11.3 million participants in the 17,500-plus corporate defined-benefit plans it runs, and found that worker contributions were down slightly from a year ago, but that exchange levels were low and declining.

Fidelity's numbers showed that about one out of every 20 plan participants traded out of one fund and into another in their plans.

That low level of activity would indicate that investors, for the most part, are sticking with a plan that may no longer be suitable or appropriate.

For most workers, however, having the same portfolio makeup after many years is akin to a monster wardrobe malfunction. The wardrobe that worked in your first days on the job might not be appropriate for you to wear years later.

Typical portfolio

The same goes for an average investor's portfolio; assuming it's not invested in life-cycle or target-date funds — which age with the investor — the typical portfolio needs to become more conservative over time.

"If investors have a contribution mix that is aligned with their retirement date and their risk tolerance and time horizon, then continuing to contribute at those percentages is the best thing to do," said John Sweeney, senior vice president of planning and advisory services for Fidelity's Personal and Workplace Investments unit.

"But don't keep contributing blindly. Look at your holdings; look at yourself. You want to make sure you have the proper target allocation, and then go rebalance the portfolio to it."

That's hard to do at a time when asset allocation hasn't seemed to work.

Asset-allocation strategies call for investing in various asset classes, diversifying a portfolio to balance risk and to always have some slug of assets that are in favor with the market.

With almost all asset classes moving in sync over the last 18 months, investors got no real portfolio-calming effect from spreading their money around.

All asset classes

"Although diversification hasn't worked very well lately — all asset classes seemed to be 100 percent correlated — it is unlikely that will occur often in the future, so having bond, REITs, large-cap, mid-cap, small-cap stock mutual funds in proper percentages usually will produce a reasonable rate of return," said Peg Eddy, of Creative Capital Management in San Diego.

"However, you don't pick an allocation only one time and just leave it at that for the entire time you are working," she said.

Rebalancing a portfolio can be tough to stomach because it involves shifting moneys away from what has been working and into asset classes that have been lagging.

Say you entered 2008 with $10,000 in retirement moneys, split 40 percent in domestic stocks, 40 percent in bonds and 20 percent in international stocks.

If your fund in each category got the median return (a 38 percent loss for domestics, a 5 percent drop for internationals and a 2.5 percent decline in taxable bonds), you ended the year with an overall loss of just over 25 percent and a portfolio that was 52 percent in bonds, 33 percent in domestic stocks and 15 percent in international stocks.

And that's just one year's worth of market motion throwing allocations out of whack; most investors have been sitting still longer than that.

Said Sweeney: "After what we all have lived through, it's important that investors check their portfolio to make sure it still meets their time horizon and risk tolerance. ... You are still trying to follow a plan that will allow you to reach your goals, and if the plan has changed over time — or your allocation has changed because of the market — your portfolio should reflect that."

Copyright 2009, MarketWatch

Chuck Jaffe is a senior columnist at MarketWatch. He can be reached at cjaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.