?Bury your head in sand? strategy on investments not sound, advisers say

Some people in the Boulder Valley monitor their investments, some don?t monitor them enough, and yet others monitor them too much, area investment advisers say.

While quarterly reviews and periodic rebalancing are keys to effectively staying on top of retirement plans and taxable investments, many still avoid these necessary steps, says Bob Webster, president of Webster Investment Advisors in Boulder.

?For the most part, I?m not sure most investors are doing any of these things. There seems to be a ?bury your head in the sand? mentality that was emotionally prompted by the 2000 bear market,? Webster says.

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In contrast, Mark Butler, an investment adviser with Butler Financial Services in Boulder, finds clients to be more engaged in monitoring their portfolios today, thanks to fear.

?In 2003, fear replaced greed. Greed was the M.O. from ?95 to ?99. Then there was a healthy dose of fear from 2000 to the first quarter of 2003,? he says.

?You can be theoretical about it and say it?s just paper losses, but my clients know ? if you lose it, it?s hard to make it back,? Butler adds. To reduce the chance for losses, he advises clients to take as little risk as possible with investments, regardless of whether the stock market is in a bull or bear market cycle.

Additionally, there are those advisers who find investors now monitor the performance of their investments perhaps a little too often.

?In general, I feel investors should monitor their investments on a quarterly basis. But it is hard not to look at things on a daily basis with all of the technology today,? says Robert Pyle, a certified financial planner and founder of Diversified Asset Management in Boulder.

For Richard Palm, senior investment consultant with Robert W. Baird & Company in Boulder, the biggest effect of the recent market correction has been how it has changed the way many people invest.

?The emphasis has turned to diversification through asset allocation,? he says. By doing so, Palm adds, investors have insulated themselves from the volatility of trying to manage a more concentrated portfolio of individual securities.

Another consequence of the downturn has been increased use of adviser services as investors have realized the skill it takes to properly diversify assets and reduce their exposure to risk.
?During the late ?90s our firm got very few phone calls for help with investments,? Pyle says. ?As the market started down, investors decided they needed professional help.? Likewise, Webster says that more incoming clients are choosing to have their assets professionally managed rather than doing it themselves.

For baby boomers and others who see retirement on the horizon, the most recent stock market dip was hard to swallow, as many watched their balances decline. Regardless of market conditions, however, investment advisers have several suggestions for investors to help protect their portfolios as they age.

?In protecting a portfolio from erosion due to risk of losses, taxes or inflation, diversification and periodic rebalancing ? are critical,? Webster says, echoing the opinion of many advisers.

Selecting mutual funds
When Pyle advises investors, he suggests they target a portfolio that allows them to withdraw the amount they need for 25 to 30 years with a 70 percent probability. He uses a problem-solving technique called Monte Carlo Simulation to generate these numbers, which determines the probability of certain outcomes by running multiple simulations, using random variables.

To develop and preserve the funds necessary to achieve this, he says his firm only recommends mutual funds for client portfolios as a measure to reduce risk. Pyle uses 11 to 15 mutual funds for each portfolio, and selects funds based on low turnovers, low costs and minimal capital gains.
To grow funds saved for retirement, Palm suggests clients, during their early and mid-career, concentrate investments in equities. Then, as they approach retirement, he recommends a modest shift toward fixed-income investments, primarily for future income. The amount transitioned to bonds depends on factors such as when and how investors wish to retire, whether they want to leave a legacy to heirs, and their life expectancy.

For people who are close to retirement, Palm says he often deals with the mindset to move all assets to bonds to avoid the risks of stocks ? a strategy that he thinks isn?t smart. To these clients, Palm reminds them that their retirement could stretch out over many years.

?It?s not unthinkable to consider retirement as entering the final one-third of your life, and that?s a long time,? he says. While preservation of principal is an important objective during retirement, outliving one?s money is also important, Palm explains. He adds that equities continue to serve a role in portfolios to address inflationary concerns and to allow for growth, even during those golden years.

Keeping an eye on your money
? After establishing a well-defined asset allocation strategy, monitor performance quarterly and rebalance the portfolio at least annually to ensure the asset allocation remains consistent.

? Use multiple investment vehicles to save for retirement. In addition to company-sponsored plans and taxable accounts, clients who qualify should invest in a Roth Individual Retirement Account. With Roth IRAs, money grows tax-free and qualified withdrawals are also tax-free.

? Know how tax law changes affect maximum contribution limits. Many investors are not aware that the tax laws have changed, allowing them to contribute more to a 401(k) and IRAs. To find out the maximum contribution limit for a 401(k), contact your plan administrator. For IRA contribution eligibility and limits, contact an investment adviser.
? Consider tax-exempt investments such as municipal bonds if you are in a high-income tax bracket. Municipal bonds produce monthly income that is exempt from federal taxes and from most state and local taxes.

? Keep emotions out of investing. Despite lessons learned from Enron, some investors invest solely invest in their company?s stock and stock options. While pride in your company is good, it?s important to diversify money across different asset classes to reduce your risk for losses.

? Regularly review documents for company-sponsored plans. At times, companies have been found to miscalculate taxes or avoid communicating changes to contribution amounts. As a result, investors should monitor contributions and matches to company-sponsored plans to ensure accuracy.