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May 14, 2009

Don't panic, say retirement investment advisers

In spite of the sinking feeling that may accompany the arrival of your quarterly retirement savings statements, you shouldn’t panic, representatives from TIAA-CREF and The Vanguard Group told Pitt employees last week in separate presentations during the Office of Human Resources’ benefits fair.

“Focus on what you can control,” said Vanguard’s Ella Smith, who noted that while investors can’t control market returns, interest rates, tax rates or inflation, they can examine their portfolios and make sure they have properly diversified their investments with an eye toward the long term.

Acknowledging the recent stock market volatility, TIAA-CREF investment counselor Chuck Rice advised, “A consistent, sound and disciplined approach to investing is the path to financial success.”

Rice said, “This turmoil that occurs from time to time has been going on since the Great Depression,” counting two world wars, the oil embargo of the 1970s, the savings and loan fallout of the 1980s and the most recent real estate market issues among the events that have impacted investors.

The current bear market began in October 2007 and, according to Standard & Poor’s, is the 10th bear market since 1958, Smith said.

On average, bear markets — defined as a 20 percent drop lasting two months or longer — come about every five years, said Smith. She noted one bear market that started in 1973 lasted 21 months; the subsequent recovery took some 69 months to recoup the 48 percent drop. Another case is the 1987 market crash marked by “Black Monday” — Oct. 19, 1987 — when the Dow Jones Industrial Average plunged nearly 23 percent in a single day.

Pointing to a more recent example, Rice said a 25-month downturn between 2000 and 2002 cost the stock market some 44 percent of its value — roughly the same percentage lost in the current bear market.

“After 2002, the market made up for what it lost there and it added double to it,” he said.

Looking back may be helpful, Rice acknowledged, cautioning, “But none of us know how stock prices will be affected in the future.”
Smith advised listeners to build a firm investment foundation that will perform well in both bull and bear markets. “Investing for retirement is over a long-term period,” she said.

The only way to be certain to win a horse race is to bet on every horse, Smith said. Mutual funds, such as those offered by Vanguard and TIAA-CREF for Pitt employees’ retirement portfolios, include several different asset classes: Short-term assets such as cash; bonds, and stocks (or equities).

Stock and bond returns tend to diverge, so when stocks are doing well, bonds typically are not, and vice versa, Smith said, pointing out that in light of the current market in which stocks have plunged, “There’s no stronger argument for having bonds in your portfolio,” she said.

Equities, Rice said, far outpace other asset classes and serve as a hedge against inflation. Over time, stocks return an average of nearly 10 percent; next best are corporate and government bonds that yield an average of about 6 percent a year, then treasury bills that average 3.7 percent a year. However, factoring in an average inflation rate of about 3 percent, a too-conservative strategy won’t allow a long-term investor’s purchasing power to really grow.

“With inflation at 3 percent, your real rate of return for a year would be reduced that much,” Rice said. By investing in assets that yield higher returns, “You’re increasing your purchasing power of your money by 1, 2, 3 percent,” he said. “That’s why people invest in equities.”

Both companies offer suggested mixes of asset classes for investors with more aggressive portfolios for those with more time left before retirement.

Both also offer targeted age or lifecycle funds for investors who want what Rice called a “set it and forget it” strategy. The funds set their asset mixes to become more conservative as a target date approaches.

Smith pointed out that such funds can be a cost-saver. Investors can get into one fund with a single expense ratio and have holdings in a variety of asset classes rather than holding multiple funds each with its own expense ratio.

Both Rice and Smith advised audiences not to try to time the market, but to stay the course even in volatile times.

“Historically the market has always come back,” Smith said, adding that no one knows for sure when the bear market will end. Investors who have gotten out of the market miss out on the recovery, she said. When markets turn around, they gain back an average of 8.5 percent in the first month, 17 percent in the first quarter and 33.5 percent in the first year of recovery, Smith said.

“Keep the contributions coming in,” she said, pointing out that when the market is low, investors essentially are getting stocks at a discount. “When the market comes back, you’ll get in on the appreciation.”

Rice stressed that listeners shouldn’t confuse portfolio adjustments such as reallocation and rebalancing with market timing.
Reallocation essentially is giving instructions on how new contributions to a portfolio will be divided among the various funds in that portfolio.

Rebalancing is taking one’s existing portfolio and realigning it to fit one’s own level of risk tolerance, Rice said. Portfolios can get out of balance quickly when markets go up or down. “It works both ways,” he said, noting that when stocks rose between 2003 and 2007, the gains might have left some investors with a higher percentage of their portfolio in equities than they intended to have.

He advised investors to review their portfolios annually to consider the risks associated with their holdings. “Stick with your game plan,” he said.

Rice and Smith both urged listeners to take advantage of online tools and individual appointments their companies offer to Pitt retirement plan contributors.

To reach TIAA-CREF, call 800/842-2776 or visit www.tiaa-cref.org/pitt. For Vanguard, call 800/523-1188 or visit www.vanguard.com.

—Kimberly K. Barlow


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