Retirement hopes not necessarily shattered if you reassess options

By DAVID MOON, Moon Capital Management
September 2, 2001

You were thinking about retirement only a couple of years ago. Your 401(k) had grown well beyond your wildest dreams and all it was going to take was another year or two and you would have your retirement nest egg ' five or ten years ahead of schedule. Then came The Correction.

If you are like millions of individual investors, your retirement plan is 10, 20 or even 40 percent lower than its peak. It is probably still about where it was less than three or four years ago, but your early retirement hopes are gone, along with your big gains in 1998 and 1999.

What should you do?

First, forget about where you have been. Forget your peak account value; that is now irrelevant. What matters is the money you DO have, not what you once had. It's like when you've put on a few pounds and your clothes no longer fit. You can think all you want about your original weight (say, six pounds, four ounces), but that won't help you, at all. What you must focus on is where you want to be ' not where you were.

If you are looking at your retirement plan assets, forget the cost basis of everything you own. These stocks and funds have no idea what you paid for them and don't care. Instead, look at the value of your retirement account. If you had this much cash in your account (instead of these dog stocks) would you put the money into these same stocks? If not, why do you still own them? Are you holding on, waiting (hoping?) they will return to their lofty levels on early 2000? Stop it. They may never. Or it may take ten years or so. Or, if you had the poor luck to pick ugly Internet investment dogs with fleas, these things may be on their way to zero.

Think about how much risk you can afford to take. What would happen if the market declined another 20 percent? Would that impact your retirement plans even more? Are you convinced that is not possible? If the S&P 500 returns to its long-term P/E ratio of 14 tomorrow, we would have another 45 percent decline in stock prices. Don't convince yourself that it can't happen. It can. It probably won't, but who would have thought Lucent would decline 93 percent in 18 months?

Measure your emotional ability to take risk, too. If you have 20 years until your retirement, you can wait out any short-term decline in stock prices. But it does not necessarily mean that you can sleep at night while it is happening. You have some experience understanding yourself and how you react to declining stock prices. Can you handle any more? Some investors, reacting to significant stock declines, stick their heads in the sand, pretending it isn't happening. Others panic, frantically selling losers of today ' and buying the losers of tomorrow. Do a serious self-analysis and determine where your 'sleeping point' is on the risk scale.

Do not extrapolate the recent past into the future; that's probably what got you into your current predicament. You assumed that as long as stocks were going up, they would continue to go up. Don't assume that the next ten years will necessarily look like the last two. They may, of course, but that is why your new portfolio should be diversified.

Quit trying to hit home runs; just get on base a lot.

Be rational, not emotional. Let history be your teacher, but not your ruler.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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