Is Your 401(k) Taking a Hit? No Time to Sit on the Sidelines

Doing nothing may no longer be an option.Think about paring back on stocks that are hemorrhaging. And consider as alternatives precious metals and other commodities. And bonds, of course.As the U.S. stock markets continue to slip on fears of a pending recession, fund managers and financial planners say it’s time to move some assets around in an effort to ward off additional losses. Others say it might even be time to look for buying opportunities.

More on the Fed Cut and What it Means for Your Money:

Historical Snapshot: Fed’s Track Record on Dealing With RecessionsOnline Savings Accounts Still Attractive, Despite Rate CutFed Slices Key Interest Rate by 0.75%Layoffs on the Rise: What You Should KnowFor Money Managers, Sell-Off is OpportunityRate Cut Opens Window for Those Looking to Refinance

The stock market was down again Tuesday, even after the Federal Reserve Bank slashed a key interest rate three quarters of a percentage point – the most at one time since 1994 – in an effort to spark the economy and stave off a recession.Broadly, the average investor whose retirement money is socked away in a 401(k) plan – usually spread across an array of mutual funds – needs to make sure their investment plans offer “defensive alternatives” for times such as these, said Axel Merk, manager of the Merk Hard Currency Fund.“Investment options are too restrictive in many plans and impose on investors the view that markets always have to go up,” he said. “Defensive choices are too limited.”Indeed, fund managers often emphasize the growth prospects of the stocks included in their funds while downplaying the reality that markets sometimes fall. But markets do fall and when they do investors need safe alternatives for their money – even if only temporarily – to help ride out the storm.Bonds are always the first line of defense in a market downturn.Chris Ciovacco, a money manager with Ciovacco Asset Management in Atlanta, suggested that investors take a look at their portfolios, see where the most damage has occurred, and pull money from those areas.

Ciovacco cited small and mid-sized stocks, as well as commercial real estate stocks, as sectors that have been getting hammered for months. Shifting money out of those sectors and into so-called defensive areas is the way to go, he said.“The market will tell you where to cut back, and what you sell first is your weakest positions – the ones that are losing the most,” he said.This often goes against human nature, however, which urges investors to hold on to a losing stock until it bounces back. “That’s absolutely the wrong thing to do,” said Ciovacco.Portfolios shouldn’t be purged entirely of any sector, he said. Instead, investors should react “incrementally.”“It doesn’t mean you’re getting rid of these assets altogether. You just want to underweight them, meaning you’re making it a smaller percentage of your portfolio,” he said.If the markets continue to crumble and the outlook remains bleak, professional investors recommend buying physical commodities such as gold and silver, because the stocks of companies tied to these commodities will be dragged down with the broader market.But if light appears at the end of the tunnel, professionals recommend buying into the stocks of commodity-based companies, such as oil or mining firms, because in a bull market stocks tend to outperform the physical commodity.Kevin Kerr, president of Kerr Trading International, said the prolonged downturn may have created some bargains for aggressive investors.He also recommended commodities, adding agriculture companies to the list of potential buys. The banking sector is another area worth exploring, he said.“Many of these companies have been crushed in the move downward and are now presenting prices that are very interesting,” he said.Kerr said he’s “cautiously optimistic” that the markets are skimming their bottom and that stocks are poised to turn around.“Sell hope and buy despair,” he said. “This is the despair level. I believe we’re pretty much there.”

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