When Your Retirement Accounts Take a Hit

Don't panic if your balances have shrunk during the market's recent gyrations.

I am 52 years old. I have $22,000 in my 401(k) plus $10,000 in an IRA, and that’s all of my retirement savings. My quarterly 401(k) statement showed a loss of $2,000. I can’t afford to lose that much. My money is divided among UBS International and four T. Rowe Price funds: Balanced, Equity Income, New Horizons and Summit Cash. Should I do anything? I am terrified.

The first quarter was a rotten one for most markets. Your portfolio took a big beating because you effectively have 75% of your investments in stocks. Unfortunately, this kind of setback occurs frequently. Since 1926, the U.S. stock market has lost money in roughly one year out of every four, on average.

Consider short-term volatility the price you have to pay for the opportunity to earn superior long-term results. And over the long term, stocks have delivered superior results: an annualized return of more than 10% since 1926. That includes the catastrophic 90% loss that coincided with the Great Depression, plus bear-market declines of nearly 50% in 1973-74 and 2000-02.

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Nevertheless, we agree with the conventional wisdom that you should base your investment choices on your time horizon and your tolerance for risk. The longer your horizon, the more you should have in stocks. If you’re planning to retire at, say, age 66, you’re 14 years from your goal. A portfolio that’s 75% in stocks and 25% in bonds and cash seems reasonable, assuming you can withstand occasional downward spirals.

As for your fund holdings, you are well diversified, with funds that specialize in big-company stocks, small companies and foreign firms. Your overseas fund, UBS International Equity, is nothing to write home about, having lagged the returns of other funds in its category by a few percentage points per year over the past five years. But it’s better to have this fund than to have no foreign stock fund at all.

Bottom line: We wouldn’t change a thing. Stick to your plan and try to keep your cool when the stock market sneezes.