Detroit Free Press
If you’re brave enough to open your 401(k) statement, get ready for stock shock.
Stock funds have been surging up — not flaming out. Sure, people won’t exactly feel rich, but they don’t need to be running scared, either.
It really is safe to take a peek at your 401(k). Do not, obviously, expect to see the same riches that you saw back in the fall of ’07 or maybe even summer ’08.
Most U.S. stock funds have posted gains so far this year.
On average, stock funds gained 10.38 percent for the year through Tuesday, according to Morningstar. That compares with an average loss of 4.56 percent for the same time last year. Most U.S. stock funds made some money, and nearly half gained more than 10 percent so far in 2009. Stocks thrived through grisly job losses, North Korea’s claims that it held a nuclear test and the bankruptcies of Chrysler LLC and General Motors Corp.
Go back three months ago and things couldn’t have looked worse. The country seemed to be headed into the next Great Depression; the world into global collapse.
“Many individual clients were in a pretty volatile state — just like the market,” said John Leis, vice president of personal financial solutions for American Century Investments in Kansas City, Mo.
“They didn’t want to open statements.”
Investors had had it. The stock market sank to sickening lows in October. Some investors saw their 401(k) plans fall 40 percent or more. People went into hiding.
The Dow Jones Industrial Average closed at 9,034.69 points Jan. 2. But gnawing worries about the health of banks, car companies and the economy caused the Dow to fall 27 percent over a few months and close at 6,547.05 on March 9.
Surprisingly, the world did not end — and investors were treated to a relief rally. In three months, the Dow gained more than 30 percent.
Talk of that next Great Depression?
It’s gone for people who live outside of the car belt.
John Augustine, vice president and chief investment strategist for Fifth Third Bank in Cincinnati, said most people feel a bit better. Stocks are no longer priced at Warning-Great-Depression-Ahead levels.
Still, the recession does remain a drag, and investors aren’t sure when bad times will end. Augustine sees more room for stocks to go up as the economy improves.
Even so, David Sowerby, portfolio manager for Loomis Sayles & Co. in Bloomfield Hills, Mich., said investors need to be prepared for a “mini-gut check” of some sort given the massive run-up for stocks in the past few weeks.
He noted that summer, in general, tends to be a weaker time for stocks, and he wouldn’t be surprised to see a pullback of 5 percent or more ahead.
Others are warning that summer won’t necessarily bring easy money back in fashion. Plenty of potential trouble spots could burn investors: Higher oil prices, deeper troubles for housing, weak corporate earnings.
Will it gradually be safer for investors to think more about stocks?
Leis said his firm is hearing from investors who continue to have 80 percent or more of their money in short-term bonds or money markets — not in stocks.
“It does feel like we’re turning a corner,” he said.
Yet investors won’t break even in just a year or two. It could take seven, eight or nine years for some to get back to old levels. And that’s if they keep investing and see annual returns of 7 percent or so.
If someone has 80 percent in a money-market account, they’re not going to make much money, and it will take far longer to return to the old high points for their 401(k)s.
“As hard as it is, individual investors need to try to use this period to rebuild their 401(k) plans,” Augustine said. “In our view, you have to use extremes to your advantage, and this is one of those moments.”
They’ve got to rebuild a diversified portfolio. If they’re comfortable, Leis said, they can make moves immediately to diversify. Or they can gradually move money out of money markets into stocks in the next six months to a year.
XSusan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at firstname.lastname@example.org.