By Jane Bryant Quinn
December 22, 2008 issue 


Illustration: Phil Marden for Newsweek

In October, when the stock market went into free-fall, I did the sensible thing. I panicked. I e-mailed the adviser who manages my retirement money: “OMG, have I been too heavily in stocks? Should we get some of it out, before things get worse? Help!”

I realize that people like me aren’t supposed to send e-mails like that, but I couldn’t stop myself. My brain told me, “Follow your system; history says it works.” My gut cried, “Are you crazy? Save what you can!”

Fear makes you stupid. To be on the other end of unhinged e-mails like this is what advisers are for. Mine reminded me about crises past and how stocks had recovered. Still, under his calm, his gut was screaming, too. “It’s a dangerous time,” he couldn’t stop himself from saying.

Besides my retirement account, I have a taxable account that I manage myself. Both are invested in low-cost, no-load mutual funds, allocated across various types of securities. Both are rebalanced periodically to maintain their original allocations. I should be weathering this shock as I did all previous ones: make regular contributions, rebalance and wait.

But this is the kind of collapse that sends you back to first principles. Were my allocations right in the first place? Stressed financial planners are asking themselves the same thing.

Take the question of safety. Planners traditionally have said, “Keep money safe if you’ll need it within two or three years,” for expenses such as tuition, taxes, buying a house or future daily bills. Money you won’t touch for longer periods can go into riskier investments, for higher returns.

That worked fine in the three market cycles during 1980 to 2000. After stocks dropped, it took less than two years for them to recover their previous peaks.

Then came the 2000–2002 bear market, which took more than six years to recover, followed by the current plunge. In a classic case of barn-door thinking, planners are reworking their definition of “safe.” Many now say that money needed in the next five years should go into bank CDs, bank money-market accounts and short-term bond funds. These investments pay more than you’d get from money funds that buy Treasuries, many of which now cost more in fees than the near-zero interest you earn. Treasury bonds are the only investment bubble left.

My OMG question was whether I had put too much of my retirement account into stocks. The rule of thumb is to subtract your age from 110 and consider that the percentage of your portfolio to put at risk. If you’re 50, you’d go 60 percent into stocks with 40 percent in bonds.

I’ve been a bit more aggressive than the rule of 110 would approve, and so have many planners. You need growth to fund a retirement that could last for 30 years, and CDs won’t cut it. I’ve thought about reducing my stock allocation. But future expected returns are higher when stocks are low, so it seems dumb to do that now. I sold some losers for tax losses, and—having fed my gut Tums—rebalanced (bought stocks) for my own account.

I’m finding that advisers aren’t as pure about rebalancing as they used to be, with mine as exhibit A. He rebalanced the fixed-income portion of his accounts, buying high-yield bond funds and Treasury Inflation-Protected Securities, whose prices are down. But he’s waiting to rebalance his stock accounts. He believes in the formula but says you get whipsawed on price when the credit markets are stressed.

And take fee-only planner William Bengen, author of “Conserving Client Portfolios During Retirement.” When Lehman failed, he became a temporary market timer—switching his clients into cash. That will prove to be the right move only if he rebuys stocks in time, he says.

Analyst Steve Leuthold, of the Leuthold Group in Minneapolis, has no doubts about what to do now. “Just buy,” he says, buy anything. He even recommends index funds, something I never thought I’d hear from a pure stock shop.

Rebalancing worked during crises past for investors who could wait it out and had savings enough to pay their bills. My OMG factor is under control (for now).

Reporter Associate: Temma Ehrenfeld