Increasingly, economists and stock market pundits are sounding the alarm over an imminent bear market.
- Economist Nouriel Roubini predicts that the Dow Jones Industrial Average will fall by 20%.
- Reuter’s financial blogger Felix Salmon offers a similar warning, telling investors that unless you're a large institution, get out of the stock market right now. “Stocks are dangerous things to own,” writes Salmon. "We are entering an era of massive volatility. You, as an individual investor, just simply don't have the risk appetite to be able to deal with that kind of volatility."
- Economist and Dow Theory Letters Richard Russell says this in a May 18 note about the stock market: “Do your friends a favor. Tell them to 'batten down the hatches' because there's a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don't need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won't recognize the country. They'll retort, 'How the dickens does Russell know — who told him?' Tell them the stock market told him.”
What’s “Job One?”
Your overall goal is to protect your 401(k) nest egg — to a point. If you’re younger and have 20-30 years until retirement, you can likely absorb a big stock market hit. Historically, stocks have proven very elastic. They snap back significantly after big market declines (just like stocks did in 2009, when the Dow Jones Industrial Average snapped back by 50%; that after a 2008 performance where the DJIA fell by 35%). If you jump into bonds now, you could miss the rebound when stocks start climbing again.
Are you experienced?
According to Hewitt Associates, only 16% of all U.S. 401(k) investors actually made a funds transfer in 2009. If the other 84% of 401(k) investors were in bonds, they missed out on a big year in the stock market. Hewitt has a reason for that “staying the course” mentality among 401(k) participants. “While it’s encouraging that most workers stayed the course throughout the market’s roller coaster fluctuations, most did so simply because they were disengaged with the retirement saving process or too paralyzed with fear and confusion to touch their 401(k) plans,” says Pamela Hess, Hewitt’s director of retirement research. “If employees continue to ignore their 401(k) plans, they’re hurting themselves by letting the market dictate their retirement strategy.”