Stocks and bonds and downgrades... oh my.

August 8, 2011 8:38 AM

What is the most prudent way to reallocate one's 401(k) in light of the US downgrade and recent market crash, assuming one has a moderate number of years until retirement and wishes to get a return on investment greater than the typical return of money market funds?
posted by I EAT TAPAS to Work & Money (5 answers total)

If you're investing for retirement with a moderate amount of time to go, you're investing for the long haul and you don't react to short-term disruptions. If you don't already have some of your allocation in international funds, this might be a good time to make that shift; otherwise, you shouldn't be trying to game the system. Statistically speaking, you will not win.
posted by Tomorrowful at 8:49 AM on August 8, 2011 [1 favorite]

Generally, the most prudent way to make ongoing allocations is to perodically prune winners and buy losers to maintain target allocation percentages. E.g., if your goal is 50% stocks and 50% bonds and because of the crash stocks are 45% and bonds are 55%, transfer money from the bond fund to the stock fund to even them again. It's an easy way for laymen to buy low and sell high, although it has the downside that huge gains are unlikely, and also assumes the target percentages are prescient. I recommend you choose an easy to remember allocation that's appropriate for your age. This one I googled is as good as any other.
posted by michaelh at 8:50 AM on August 8, 2011 [1 favorite]

The best advice for this is either do what michaelh says or just do nothing. This too shall pass. Yes S & P downgraded our credit rating. Nothing actually changed, and S & P also told everyone that Mortgage backed securities where as safe as U S Treasury notes in 2005, and that rating was totally accurate, right? The US has just as many people who are just as educated with the same industrial base as it did last week. The market will realize this soon, just as it did in March of 2009. Now is not the time to sell, it is the time to buy. Yep its risky, so is getting in a car and going to work or having a kid or buying a house or falling in love. Life isn't what happens when you play it safe, it is what happens when you seize the oppurtunities presented. I wouldn't go 100% into penny stocks either though, i would just keep on with the conventional wisdom in market investing for the long game and accept that this is just a hiccup in the long term (in which we are all dead anyway). I am doing nothing with my retirement money. I made some allocation changes to increase my exposure to overseas market in 2009 at the expense of conventional growth stocks in the US. That has proven to be pretty good in the last 2 years. Buy I still have about 50% exposure to this market even now. And will continue until i see an actual change in the long term economic viability of the US.
posted by bartonlong at 10:54 AM on August 8, 2011

Decades until retirement? Do nothing (beyond your standard annual/quarterly reallocation process).

Don't change your contribution amounts.
posted by shew at 11:19 AM on August 8, 2011 [1 favorite]

The US stock market is having a fire sale on stocks right now.

Some may be smoke damaged, and reparable with a light airing-out.

Others may have more serious damage, not immediately visible as you inspect the goods. Or maybe, none have seriously lost functionality at all.

That is all.
posted by IAmBroom at 1:26 PM on August 15, 2011