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Jewish World Review January 27, 2009 / 2 Shevat 5769 Taking steps can help regain some control By Gail Marks Jarvis
http://www.JewishWorldReview.com | (MCT)
Losing money on investments hurts, but what might really be eating at you is feeling a loss of control.
That can cause you to make mistakes like cutting back on saving, or yanking money out of your 401(k) or 529 college plan, despite awful tax penalties.
So bolster your resolve by giving yourself a sense of control with these moves:
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Move beyond a 401(k).
You have to save for retirement, but it doesn't have to all be in a 401(k).
At work, you are stuck with the fund choices your company gives you, and some employers have eliminated choices that make people feel safe. You might not have a money market fund or stable value fund - two places where investors can park a portion of their money during market upheaval.
Also, 401(k)'s typically invest in mutual funds, and on a day when the market is crashing, some investors can't stand the helpless feeling that comes with mutual fund rules. You must wait until the stock market closes for the day before you can sell a fund, and then your loss is sealed.
Here's one solution: Leave 401(k) savings where they are, and make sure you are saving enough to get any matching money your employer provides. But beyond that, channel retirement savings into an individual retirement account or a Roth IRA at a discount brokerage.
With an IRA, you are free to pick your own funds, stocks, bonds or certificates of deposit. And if you choose exchange-traded funds instead of regular mutual funds, you will have diversification plus maximum control - the freedom to sell at any time when market is crashing.
So instead of a mutual fund that invests in large companies, you could choose an ETF identified by the symbols SPY or IVV. For foreign stocks, you could choose EFA.
Of course, it's not a good idea to flee a well-diversified portfolio of stocks and bonds. But sometimes just knowing you can leave on an awful day might help people to stay put.
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Adjust college savings.
Saving in 529 plans offered by states is popular and helps avoid taxes on college savings.
But in the last year, people have been brutalized by the limited investing choices within some 529 plans.
You don't have to accept a lousy 529. Money can be shifted to other investments within a 529 twice a year or to a 529 in another state. To compare investment choices and quality within 529 plans, use www.savingforcollege.com.
If you would like more control, consider opening a Coverdell education account at a discount brokerage firm. Like an IRA, these funds give you the freedom to choose any investment, including ETFs or CDs. Change investments so they are safer as your child approaches college age. For example, if your child is starting college next year, you could shift out of funds with stocks and hold only CDs.
Another savings tool that provides freedom: a Roth IRA in the parent's name. Each parent can set aside at least $5,000 a year. The limit on a Coverdell is $2,000.
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Run a comparison.
You might think you have a lousy mutual fund in a 401(k) or 529 and should consequently make a change. But that might not be true.
Virtually every fund lost money last year as the stock market sank. So compare your fund to the average. If your fund is acting like the average, it probably is a keeper.
To compare your fund, use the Lipper Inc. list posted at www.chicagotribune.com/money. In the column marked "YTD," you will see how the average fund of each type did last year. So if you are investing in a fund that invests in large stocks, look at "large cap core." The average decline was more than 39 percent. Your fund may be roughly that too - not fun, but in line. If you have a fund in your 401(k) that is investing for your retirement date of 2020, look up "mixed asset 2020."
Consider making a shift in funds if yours consistently trails the average. And consider a change if your fund charges high fees. Look for an "expense ratio" (or fees) of less than 1 percent.
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Try tweaking.
Know how someone your age is expected to invest. If you have a 401(k) with target-date funds in it, look for your retirement date. For example, if you plan to retire in 2025, you may see a fund with 2025 in its name that divides money in a way considered reasonable for your age.
But if you've been feeling too unsettled with losses, you can be more conservative by choosing a fund for people closer to retirement - maybe 2015, for example.
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Find help.
I like young people to invest on their own because many good financial planners don't bother with people who have less than $250,000 to invest. But if you are paralyzed, yanking money from your accounts one day and debating whether to try again the next, you need help. Find a certified financial planner who charges for only an hour or two of advice and doesn't sell products. Go to www.garrettplanning.com.
Every weekday JewishWorldReview.com publishes what many in the media and Washington consider "must-reading". Sign up for the daily JWR update. It's free. Just click here. Gail Marks Jarvis is a personal finance columnist for the Chicago Tribune and author of "Saving for Retirement without Living Like a Pauper or Winning the Lottery." Comment by clicking here.
01/20/09: How to save for college during a recession
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