Sometimes things don't workout as planned. Here's how to handle a market decline.
Question: My parents retired with $400,000. They used a respected investment advisor who put all their money into mutual funds. Now their funds have lost a lot of value. My parents haven't sold, so technically they haven't lost any money yet. But it breaks my heart to see them so worried. What should they do to recover from this mess?
Suze: Mess is exactly the right word for what can happen when you put all your eggs in one basket—and that basket happens to drop. Between March 2000 and January 2002, the Nasdaq Composite Index dropped 53 percent. Mutual funds, which are for the most part made up of stocks, dropped with it, and now millions of Americans are looking at potentially serious shortfalls in their investment accounts. So you and your parents are certainly not alone.
Can Humpty Dumpty be put together again? That depends on when your parents will need the money they've invested. It may take up to 10 years for the market to recover. Why do I say that? Consider the precedents: At the end of 1964, the Dow Jones industrial average stood at 874; in 1982, after going up and back down for years, it stood at 875. The point is that markets don't simply rise and fall, they also go sideways, and they can go sideways for a long time. If your parents have ten years before they need to access their money, the most important thing they can do is to diversify.
A lesson I hope we have learned over the last two years is that even when you own dozens of different mutual funds, you do not necessarily have diversification. Anyone who owns more than one mutual fund should go to SmartMoney.com. At the top of the opening page, right under the words "delayed quote," type in the name or the symbol of your fund (you can find it on your quarterly statement), then click. Scroll halfway down this page and print the list of the top ten stock holdings for your fund. Repeat this for every mutual fund you own, then compare the top ten holdings of all your funds and take note, for you may find that they are similar. In that case, you will need to correct this situation and find mutual funds with different stated goals (growth or maintaining value, investments in different industries, and so on).
Diversification also means owning different kinds of assets. For example, I have some of my money in stocks, some in real estate, some in bonds, and some in money market accounts. That way, if the stock market goes down, my bonds may compensate by going up, or my real estate may increase in value, or the earnings I get paid on my money market accounts may rise.
If your parents have the time to reallocate their money and let it grow again, and if they will keep a watchful eye on it themselves, they will very likely recover. I think we'll see the stock market turn sunnier by the middle of 2002 and into 2003. If your parents don't have ten years to wait out the market, they should move the amount they want to keep safe into a money market fund or individual bonds. Meanwhile, you and your parents—and many other people—will have learned a valuable lesson about how to keep a nest egg safe.