Don't Look Back

By DAVID MOON, Moon Capital Management
September 17, 2006

I see it fairly regularly: You retired when stocks were at their peak and the projections looked rosy. When prices began to decline, the financial rose petals began to wilt, but you assumed everything would work out OK.

Six years of flat performance later, you're worried. Real worried.

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 have, not what you once had.

It's like when you've put on a few pounds and your clothes no longer fit. I can think all day long about my original weight ' four pounds four ounces ' but that won't help me get into a 54-long sports coat.

I need to focus on my goal, not some arbitrary point in the past.

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?) that they will return to their lofty levels of early 2000? Stop it. They may never. Or it may take ten years or more.

Think about how much risk you can afford to take. What would happen if the market declined another 20 percent? Would that jar your retirement plans even more? What if we had another five or so years of flat investment returns? It's possible. In 1966 the Dow Jones Industrial Average stood at 1,000. Sixteen years later, in 1982, after gyrations both up and down, it returned to 1,000.

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.

Based on the last few years, you already 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 the losers of today ' and buying the losers of tomorrow.

Do not extrapolate the recent past into the future; that's probably what got you into your current predicament. You may have assumed that as long as stocks were going up, they would continue to go up. Don't assume that the next five years will necessarily look like the last five.

They may, of course, but that is why your new portfolio should be diversified.

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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