Wait-and-hope strategy for some investors

updated 7:49 p.m. ET Sept. 21, 2008

BOSTON - A financial crisis being described as the worst since the Great Depression has left investors thinking far beyond the realm of whether it’s time to buy or sell.

No matter how close they are to retirement, many are considering getting out of the stock market entirely by shifting to cash or even gold, believing the market is so shaky they’re willing to take the potential tax and inflation erosion they’ll suffer from a quick pullout.

Others are staying in, even after this year’s 14 percent decline to date in the Dow Jones industrial average has eaten away at what they had thought were safe portfolios.

“Right now, it is just a loss on paper. If I pull out now, it becomes an actual loss,” says Deborah Allen, a 51-year-old administrative assistant at a Royal Oak, Mich., school district who’s trying to protect a nest egg she’s relying on to take early retirement next year.

Allen has about $50,000 in a retirement account, known as a 457 plan, that she plans to use in early retirement until she can draw pension benefits at age 55. But despite a conservative investment mix, the account has shrunk this year in a falling market.

“The money that I thought was going to be there isn’t there, so I’m going to have to really look closely over how I’m handling my money for at least the next year,” she said.

Many others are cutting back on expenses or considering delaying retirement — the primary aspects of their economic lives where they feel they have control — and leaving investment portfolios untouched as they emotionally prepare for the worst.

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“I’m not ready to jump out of a window,” said Bob Shanahan, a 49-year-old estate planning attorney and married father of two teenage boys from Annandale, N.J. “If I have to sell apples on the street corner, I have no problem with that. I can live modestly; a lot of people can’t.”

Shanahan has a portfolio of about $500,000 held in individual retirement accounts — down $40,000 over the past few months. He could switch to more conservative investments, but if he withdraws now and converts to cash, he’d pay early withdrawal penalties and earn income this year that could push him into a higher tax bracket. Without the historical returns that stocks typically generate, he fears he could run out of cash in retirement.

“I’m not going to take all that money and put it in cash, because I would get hit with taxes like you wouldn’t believe,” he said. “I’ve got 15 to 20 years until retirement, and I’ll let it sit there, and hold my nose.”

Several financial planners worked the weekend to hold clients’ hands, hearing a broad spectrum of fear and uncertainty. Some customers called to say they were inclined to shift holdings to bank savings accounts, or anywhere but the stock market.

“I had one couple who already had a relatively low-risk portfolio, but they said, ’We just don’t want to hold any stocks, ever,”’ said Rick Miller, founder of Cambridge, Mass.-based Sensible Financial Planning.

Miller said the week’s volatility offers an opportunity for investors to consider risk, “and learn whether they still think their financial plan can tolerate it, and whether they can emotionally tolerate it.”

While Miller and other planners cautioned against letting the market events of a few weeks or months influence long-term retirement planning, they also acknowledged that the government’s unprecedented rescues have undercut normal assumptions about how to assess risk and make investment decisions.

“For most who beat the market, it’s going to be a matter of sheer luck, rather than skill,” Miller said. “And if we’re trying to predict both what the market will do and what the policymakers will do, it’s even harder.”

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