Afraid

From the news services:

Investors’ anxiety builds as retirement nest eggs show cracks

By Robert Weisman, Globe Staff | July 6, 2008

The bad news is in the mail.

In the coming week, millions of ordinary investors will rip open envelopes holding their retirement account statements for the second quarter and cringe. Most will find their stock and bond funds in 401(k) and individual retirement accounts sank between April and June as soaring fuel prices and woes in the financial sector dragged down markets.

While the first quarter also brought some steep declines, the second quarter could feel more painful to the majority of investors who track market activity casually, financial advisers say. That’s because markets climbed through April and early May, before tumbling late in the quarter, dashing hopes of a recovery.

“I open it when I get the statement and weep,” said Joyce Kauffman, 58, a lawyer from Roslindale. “I keep putting money in, and I’m not getting anywhere. I look at it, I grimace, and I file it away.”

Lillian Gonzalez, 51, an accountant from Stoughton, said she gets “sweaty palms” when statements arrive. “The closer you are to retirement, the more anxiety it’s going to provoke,” she said.

That kind of reaction does not surprise Michael A. Cirillo, a psychologist in Worcester with an interest in the ups and downs of investor behavior.

“Anxiety and avoidance go hand in hand,” he said. “It’s probably a coping mechanism, though not necessarily a sound one.” Some people become so anxious that they make the critical mistake of thinking they can “time” the market,” Cirillo said – they pull money out of stocks that are on their way down and miss the subsequent rally.

Investor dread in this slowdown has been compounded by a slump in housing values and increases in gas and food prices. Then there’s the Dow Jones Industrial Average, which closed in bear market territory last week, meaning it’s down 20 percent from October’s peak.

“I’ll take a quick look at it and put it right down,” Chris Neri, 57, a Plymouth realtor, said of his quarterly statement. “Right now I’m just treading water. I try to think long term. I’ve probably got another eight to 10 years before retirement, so hopefully I’ll catch an upswing and get out alive.”

Such long-range thinking has been ingrained in investors who have experienced the ups and downs of past economic cycles. Some said they try to boost contributions to retirement funds when the market retreats to buy shares at a discount, but others said escalating costs have left them no choice but to scale back. Most have kept their contributions steady, as financial planners advise, while looking to rebalance their portfolios between stocks, bonds, and cash.

“My portfolio lost $18,000 in the first quarter, and I just shrugged,” Gonzalez said. “I don’t fret about it. If it doesn’t come back, then everyone’s going to have some real problems.”

But expectations of a rebound are cold comfort after a second quarter during which the Dow average plunged by 7.4 percent, the Standard & Poor’s 500 by 3.2 percent, domestic-stock mutual funds by 9.7 percent on average, and foreign-stock funds by 11.9 percent on average.

Most bond funds were down, too, with short-term US Treasury funds skidding 3 percent in the three months ending June 30. Among the few bright spots were tech stocks, with the Nasdaq eking out a 0.6 percent gain for the quarter.

Stockbrokers and financial planners have been doing more than their usual share of hand-holding lately, as they have in past market corrections. After the last bear market, between 2000 and 2002, it took nearly four years for the Dow to recoup all of its losses.

“People are paying more attention, and need a little more reassurance,” said Stuart L. Ritter, a certified financial planner for T. Rowe Price, a Baltimore investment firm. “There are people we might spend some time reassuring, but there’s no wholesale panic.”

Still, new contributions to mutual funds for investment and retirement accounts are showing strain. New cash in-flows declined from $139.9 billion in January to $122.8 billion in February to $56.2 billion in March, according to the Investment Company Institute, a Washington trade group. Investors pulled $16.8 billion out of funds in April, the first net outflow since September 2005, suggesting some money is being reallocated to bonds or cash, before adding $83 billion in May, the most recent month for which data are available.

The numbers do not indicate whether investors have lightened up because they are nervous about the market or because they’re too financially strapped to raise their contribution levels.

Most financial counselors tell clients to ignore quarterly statements, though they recognize that few do. During bull markets, they said, many investors watch their portfolio obsessively online.

“As a general rule, I think people should decide on their risk tolerance, develop their allocations based on that, and then only look at it once a year,” said Bill Driscoll, a financial planner in Plymouth. But Driscoll conceded that “almost nobody” follows that advice.

Joanne Dalabon, 46, a Sharon office worker, said the quarterly ritual of peeking at her retirement statements is irresistible.

“I’m always dying to open the envelope, and see what’s in it,” said Dalabon, who has two children and college bills on the horizon. “When you have more, it’s like a little Christmas present. When you have less, you have to live with it. I’ve learned to not let it upset me because I’m not ready to retire and there’s nothing I can do about it.”

Robert Weisman can be reached at [email protected]

This article is why I have spent two and one half years in total, interviewed over 100 people (from Nobel winners to regular Joes) and traveled 75000 air miles all to get at why so many people go through life afraid of that envelope!

2 thoughts on “Afraid

  1. I think it would be better if there is a choice of trend following fund like Man AHL or Superfund.

  2. I think it would be better if investors began taking responsibility for their own results rather than blaming the markets everytime things head south! Van Tharpe calls it “respondability” I just call it taking care of my own results!

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