In the May issue we talked about looking for some signs of stability or sanity in the markets. Now, some five months later, sanity and stability have seemingly been restored with the markets having moved (much) higher versus this time last year.
So, as the new year approaches, what are some recommendations we should consider offering to our plan participants in preparation for 2010?
Rebalance, rebalance, rebalance.
For example, there has been, in what some term, a flight to quality (in the form of Government bonds) during the last 12 months. And that, in turn, has driven the price of those bonds higher - until sometime in 2010, when the Federal Reserve begins to raise interest rates and the value of those bonds declines. So, perhaps taking those profits from government bond funds and reallocating them to corporate bond funds might prove profitable. And perhaps prudent.
Diversify, diversify, diversify.
It would seem all we hear about is the stock market and predominantly the domestic stock markets, the Dow, the S&P 500, and the NASDAQ.
We might remind our plan participants that there are markets, and hopefully investment choices within their plan, that exist outside the United States. And, should inflation reappear here at home, with its attendant negative impact on domestic stocks, stock funds positioned outside the United States should remain relatively unaffected.
Keep investing or at least remain invested.
Early on in any market retreat, plan participants are faced with three choices: sell, hold or buy. Those participants who chose to stop their pre-tax deferrals and sell their previously profitable positions within the plan theoretically should have less in their account. By selling and moving to a money market option within their plan, they severely limited their ability to recover as the performance of their holdings recovered.
Those participants who held on during this recent market meltdown fared far better than those who sold because they remained invested as the performance of their plan improved, in some cases improved dramatically.
Those participants who either continued their deferrals, or even increased them, fared far better than their seller or holder colleagues. By continuing to defer, these participants were able to acquire shares at bargain prices for the short term and benefit for the longer term as the markets rallied.
And how should we be advising our plan sponsors? Remind them of their obligation as a fiduciary to review both the performance of the plan's portfolio as well as the expenses of maintaining that portfolio.
Remind them that nowhere in ERISA (Employee Retirement Income Security Act) is it stated that the plan's investment options be comprised of only the best performers nor the cheapest.
And remind them that prudence is a process - provided you can prove it.
