What should you do about your 401(k)? Experts advise holding firm, diversifying investments

BY CATHY JETT

Date published: 10/8/2008

BY CATHY JETT

As Congress made its first stab at approving a staggering $700 billion bailout of Wall Street last week, phones began ringing at Smith Barney.

Clients of the company, which oversees 401(k) plans for a number of Fredericksburg-area businesses and individuals, were nervous that the stock market would continue its gut-wrenching free fall.

"Everybody sees the headlines and it's scary," said David Andreadis, a Smith Barney financial advisor in Bethesda, Md.

Most of the callers were either second-guessing their asset allocation or asking if they should stop sinking money into their 401(k) until the market begins to bounce back, he said.

And no wonder.

More than 20 million Americans had invested roughly $1.2 trillion in 401(k) plans as of 2006, the most current statistics available. And they're seeing that money shrink as the stock market plunges.

For younger investors, this is the first time they've experienced such dramatic declines, Andreadis said. The most worried callers, however, are those approaching retirement, because they remember how long it took to recover after the dot.com bubble burst in 2000.

His advice?

Andreadis said he tells clients to step back, take a long-term view of the situation and not yank their money out of their 401(k) plan--especially now when stock prices are low.

"History has shown us that if you continue with a buying program, it will be very profitable going forward," he said.

Pamela Drake, head of James Madison University's quantitative finance and finance and business law departments, recommends much the same thing.

"Don't do anything drastic," she said. "Don't pull all your money out or put more in anything that you wouldn't have done otherwise."

People who panic and react are apt to make a foolish mistake, said Drake, using as an example the Dow's record plunge of as much as 800 points before closing with a loss of 370 points Monday.

"Had you reacted and sold things when it was down," she said, "you would have sold too early."

Other steps people should take include making sure they are allocating their 401(k) contributions appropriately for their age, time frame for tapping their plan and comfort level for risk, Andreadis said.

Date published: 10/8/2008