DALLAS -- At the height of the recession and the tumult in the stock market, many workers were stunned to see their 401(k)s shrink to 201(k)s.
How badly your retirement account was hit depended on several factors, but the average 401(k) plummeted 24.3 percent in 2008, according to the Employee Benefit Research Institute.
Now that the economy and market are recovering, it's time to work on rebuilding your investment portfolio. Here are some steps you should take to rebuild your investment portfolio now that the economy and market are recovering:
TAKE IT SLOW
Many consumers might understandably still be scared that the market might take another deep dive. So should you get back in now?
Sure, but do it cautiously.
"I talk to people who say, 'I'm still a little nervous,'" said Brian Bruce, director of the ENCAP Investments & LCM Group Alternative Asset Management Center at Southern Methodist University. "Timing is an incredibly difficult thing for people."
Get back into the market in baby steps by using an investment strategy called dollar-cost averaging. That's where you buy securities in fixed dollar amounts at regular intervals, regardless of what direction the market is moving.
That way, as stock prices rise, you're buying less, and as prices fall, you're buying more.
"Don't have this as, 'I've got one bullet,'" Bruce said. "Divide it up into four or five or six months and stick to a discipline and average yourself into the market over time."
AVOID TOO MUCH RISK
Don't pour all your money into high-risk investments hoping to rebuild your balance in one quick strike.
"Trying to make up for lost ground by taking more risk can be like stepping on the gas to drive out of a mud hole," said Rick Salmeron, certified financial planner at the Salmeron Financial Network Inc. in Dallas.
"More risk equals more odds that you'll lose money," he said.
Also, look for investments whose risk level matches your level of tolerance.
DIVERSIFY, DIVERSIFY
Follow the time-honored, old-fashioned principles of investing.
"They should have a diversified, balanced portfolio," said Ed Butowsky, managing partner at Chapwood Capital Investment Management LLC in Addison, Texas.
Salmeron agreed.
"Many who weren't diversified before (the market meltdown) got clobbered," he said. "Diversification does not protect from loss; it can help minimize the losses."
Make sure your investments don't all tend to move in the same direction.
"You should have investments that go up when other investments don't go up," Butowsky said. "Have investments that have different risks."
ALLOCATE FUNDS WISELY
Make sure how you divvy up your money coincides with how much time you have until you need the money for retirement.
In other words, if you're going to need the money soon put it in more liquid investments. If you won't need it for many years, you can go for illiquid products.
"We know that a lot of participants panicked and put all of their assets in cash," said Christopher Jones, chief investment officer at Financial Engines, an investment advisory firm. "If you're more than one or two years from retirement, having an all-cash allocation is not a particularly appropriate asset allocation. You're forgoing a lot of opportunities to accumulate higher returns."
MAXIMIZE SAVINGS
Look at your paycheck and expenses and see if you can raise the amount you contribute to your 401(k).
"The biggest lever is savings," Jones said. "Increase your savings rate. Make sure you're maximizing any employer match. If they're no longer matching, it still makes sense to save as much as you can on a pretax basis so you get the benefit of compounding over the years before you reach retirement."
BE PATIENT
Don't expect to get rich quick.
"When it comes to investing, climbing out of the hole always takes a lot longer than falling in the hole," Salmeron said.
"Today's solutions aren't found in some hidden corner in an outside world. Instead they are found in our own behavior."
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