May be time to take stock in your investments

John W. Schoen Senior producer • Profile • E-mail

A year after the financial markets trashed trillions in retirement savings, it's a great time to take a closer look at your investment risk.

I am about five years away from retirement.  Should I be considering repositioning the funds in my portfolio to less risky investments?  The value of the portfolio has regained some of its losses.  I am thinking that I can keep things more stable by moving to safer investments in my 401(k).
— Janice C.,  Providence, R.I.

The anniversary of the Panic of 2008 is about as good a time as any to take a fresh look at how much investment risk you feel comfortable with. While there’s really no “one size fits all” approach,” here are some things to keep in mind.

Despite what you may read or hear from many financial advisers, there is no such thing as a “completely safe” investment (except for insured bank deposits). Even rock-solid U.S. Treasuries — backed by the full faith and credit of Uncle Sam — can lose value if interest rates go up. And given the extremely low level of rates today, it seems likely they will head higher at some point over the course of the next decade.

The outlook for stocks is just as murky. After destroying trillions of dollars of retirement savings, the stock market has given back some of those losses in the last six months. But it’s far from clear that those gains will continue. The bull market that began in 1982 and proceeded — with some notable pullbacks — to push prices to record highs was really something of an aberration. The odds are just as good that we may be entering a period more like the 1970s, when stocks rallied and fell sharply several times, only to finish the decade about where they began.

If that happens, five years might not give you enough time to recover from one of those down cycles. That means putting more emphasis on preserving your retirement savings rather them maximizing your chances to make them grow. It doesn’t necessarily mean avoiding stocks altogether — even in the worst of times, many large, well-managed companies make it through the storm without missing a dividend.

Which brings us to another major consideration as you approach retirement: You’ll probably want to shift your emphasis from investment gains to investment income. A lot depends on just how much you’re going to rely on your savings. If your retirement plan includes enough other sources of income — Social Security, private pension, income from part-time work — you can afford to take a little more risk with your investments. If you’re relying on your 401(k) to pay the rent and buy groceries, you’ll have to be a lot more conservative.

Finally, there’s no “right” or “wrong” level of risk. Some people would have a hard time sleeping at night without a guaranteed income from, say, an annuity. Others are willing to take bigger risks — knowing they may have to downsize their cost of living if the gamble doesn’t pay off.

That may be the one good thing that came out of last year’s meltdown. After years of relentless rise in stock and housing prices, we all learned the hard way what market risk is all about.

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