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Unrest has investors questioning risk fundamentals

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[September 22, 2008]  BOSTON (AP) -- A financial crisis being described as the worst since the Great Depression has left investors thinking far beyond the realm of whether it's time to buy or sell.

CivicNo matter how close they are to retirement, many are considering getting out of the stock market entirely by shifting to cash or even gold, believing the market is so shaky they're willing to take the potential tax and inflation erosion they'll suffer from a quick pullout.

Others are staying in, even after this year's 14 percent decline to date in the Dow Jones industrial average has eaten away at what they had thought were safe portfolios.

"Right now, it is just a loss on paper. If I pull out now, it becomes an actual loss," says Deborah Allen, a 51-year-old administrative assistant at a Royal Oak, Mich. school district who's trying to protect a nest egg she's relying on to take early retirement next year.

Allen has about $50,000 in a retirement account, known as a 457 plan, that she plans to use in early retirement until she can draw pension benefits at age 55. But despite a conservative investment mix, the account has shrunk this year in a falling market.


"The money that I thought was going to be there isn't there, so I'm going to have to really look closely over how I'm handling my money for at least the next year," she said.

Many others are cutting back on expenses or considering delaying retirement -- the primary aspects of their economic lives where they feel they have control -- and leaving investment portfolios untouched as they emotionally prepare for the worst.

"I'm not ready to jump out of a window," said Bob Shanahan, a 49-year-old estate planning attorney and married father of two teenage boys from Annandale, N.J. "If I have to sell apples on the street corner, I have no problem with that. I can live modestly; a lot of people can't."

Shanahan has a portfolio of about $500,000 held in individual retirement accounts -- down $40,000 over the past few months. If he withdraws now and converts to cash, he'd pay early withdrawal penalties, and earn income this year that could push him into a higher tax bracket. Without the historical returns that stocks typically generate, he fears he could run out of cash in retirement.

"I'm not going to take all that money and put it in cash, because I would get hit with taxes like you wouldn't believe," he said. "I've got 15 to 20 years until retirement, and I'll let it sit there, and hold my nose."


Several financial planners worked the weekend to hold clients' hands, hearing a broad spectrum of fear and uncertainty. Some customers called to say they were inclined to shift holdings to bank savings accounts, or anywhere but the stock market.

"I had one couple who already had a relatively low-risk portfolio, but they said, 'We just don't want to hold any stocks, ever," said Rick Miller, founder of Cambridge, Mass.-based Sensible Financial Planning.

Miller said the week's volatility offers an opportunity for investors to consider risk, "and learn whether they still think their financial plan can tolerate it, and whether they can emotionally tolerate it."

While Miller and other planners cautioned against letting the market events of a few weeks or months influence long-term retirement planning, they also acknowledged that the government's unprecedented rescues have undercut normal assumptions about how to assess risk and make investment decisions.

"For most who beat the market, it's going to be a matter of sheer luck, rather than skill," Miller said. "And if we're trying to predict both what the market will do and what the policymakers will do, it's even harder."

As an example, Miller pointed to the folly of investors who sold at midweek. The market suffered a massive loss Monday as investors woke up to two storied financial firms gone in a buyout and a bankruptcy. There was a rebound Tuesday, another plunge Wednesday and rallies on Thursday and Friday after the government intervened.

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"If you had sold on Wednesday, you would have missed out on a 7 or 8 percent recovery," Miller said.

Such gyrations fed fears last week that triggered a Depression-style run of massive withdrawals by institutional investors in typically safe money-market mutual funds after a handful of funds' underlying assets fell below $1 for each investor dollar.

Meanwhile, gold prices rose $70 an ounce on Wednesday -- the largest one-day jump in history -- and online brokerage Scottrade Inc. saw its highest-volume trading day ever on Thursday as investors rushed to move money in their portfolios.

Such moves often result from people's natural bias to take action in response to turmoil, and satisfy a need to do something, even if staying put makes the most sense, said Stuart Ritter, a certified financial planner with T. Rowe Price.

"A lot of people may be feeling anxiety because they never created a financial plan for their retirement in the first place," Ritter said. "But if you have one, and if you have properly allocated your portfolio with the right mix of assets, you need to stick with that plan. Your time horizon toward retirement hasn't changed this week."


Even if this market meltdown is fundamentally different than others, many advisers are turning to the time-tested mantra of riding out the storm, and counting that history will repeat itself and stocks will eventually rebound. That's been the case with every market tremor from the Great Depression the dot-com bubble, Ritter said.

"The tendency is for people to say this is different, and we will never recover," Ritter said. "But each time, historically, the market has been resilient. I don't know if this is a different one."

At age 90, Steve Blauvelt lived through the Great Depression, and he's betting this time around that markets will eventually rebound.

The retired chemical engineer from Wall Township, N.J. has recently shifted investments in his $1 million portfolio to oil, coal and uranium stocks, and he enjoyed a gain of 3 percent last week as the Dow Jones industrial average finished down about 0.3 percent, 33.55 points.

Early in the week, Blauvelt even invested a couple thousand dollars in an exchange-traded fund that tracks the solar energy business.

"It was a buying opportunity," Blauvelt said. "I don't think we're out of the woods yet, no matter what the government does with its bailouts. My attitude is this thing is going to be here a little while longer, and I will see a lot of ups and downs, but I have a firm conviction in the stocks I'm holding, and I'll stick with it."

[Associated Press; By MARK JEWELL]

AP Business Writer Dave Carpenter contributed to this report from Chicago.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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