Deschutes 401(k) Advisor
Sensible Solutions for Retirement Planning

2Q 2002

Assessing the Damage
In the market aftermath...where do we go from here?

At this point in the savings game, many may have suffered heavy losses in the past 2 years, and just want to know where to go from here. How do we regain our footing on the long trek to retirement? How do we avoid suffering these types of losses again? Before we go there, let’s take a big step back and look at what really happened over the last 10 years.

What is “the market” anyway?

There are several major indices commonly referred to when assessing market performance over a given period of time. The S&P 500 (frequently used as a benchmark for large US stocks) is basically made up of the largest 500 companies in the United States, its value dominated by the very largest U.S. companies. The Dow Jones Industrial Average (DJIA)--another bellweather for large company stocks--is an even smaller sample of U.S. companies, consisting of only 30 companies selected to represent the dominant U.S. industries. The NASDAQ Composite (also called the over-the-counter market) is composed of thousands of smaller companies.

A look down memory lane

In June 1992, the S&P 500 Index was valued at just over 400, the stock market was roaring and 401(k) plans were just getting going with participant direction and heavy use of stock mutual funds. For the next 8 years a bull market ran full steam ahead as investors plowed more and more money (including lots of 401(k) money) into stocks until the S&P 500 Index topped out at over 1,500 in March 2000. Meanwhile, similar all time highs were being reached by the Dow Jones Industrial Average and the NASDAQ Composite Index.

After peaking in March/April 2000, all three of these major indices began to drop, at first slowly and then more rapidly until the NASDAQ had lost 72% of its overall value as illustrated above. The S&P 500, meanwhile, lost 39% of its value, and the Dow 36%. Jittery investors suffered further losses in the wake of 9/11 and the resulting closure of the U.S. Markets.

So, where do we go from here?

As we go to print in mid-June 2002, the markets have continued their slide. These declines are signaling that we must adjust our expectations to the lower returns that we can surely expect over the next 10 years. Now is time to go back to the basics of saving as much as possible and remember to diversify.

The Economy and the Stock Market

So, how do we know we’re in a recession anyway? The National Bureau of Economic Research (NBER), which is made up of a group of academic economists from Harvard, Stanford, and other universities, determined that our most recent recession began in March 2001, and deepened after 9/11, ending 10 years of U.S. economic growth and our longest economic expansion ever. In recent weeks, news on the economy—and its forward-looking implications for continuing growth and rebounding profits—has been uniformly excellent.

While some analysts believe that the economy, based on recent economic indicators, has emerged through its recession, the market has other concerns, such as corporate earnings, accounting scandals, and the Middle East. It’s important to remember that there is never a “best” time to invest (you never know where things will be tomorrow). What’s more important is that you invest something.

Remember, the stock market is a predictor (or discounter) of future economic returns, but it’s not a perfect mechanism with respect to timing. Sometimes it’s predicting events that don’t wind up having an economic impact, thus misleading short-term investors. Over the long haul, however, the market’s always right.

Diversification remains the key...

Asset allocation is one of the critical factors in your retirement savings performance over time.

One of the major goals of strategic asset allocation is to maximize the amount of return you can achieve while maintaining an acceptable level of risk. Diversification helps reduce risk by allocating your savings among different types of investments and investing styles.

Over the last 10 years or so many investors have ignored the “rules” of diversification, believing instead that the markets will continue to go up, or chasing the latest “darling” of the growth-oriented stocks and mutual funds. As the table on page 2 illustrates, many investors who ignored asset allocation over the last several years faced significant losses while those who followed a diversified strategy surely lost, but not as greatly.

Diversification remains the key. Asset allocation is simply the best way to balance risk and return. Proper asset allocation is not intended to produce a “home run” in a given year or even beat that year’s top performing market index. The primary goal of asset allocation is to balance your long-term goals with your tolerance for risk, producing a return adequate to help you achieve your long-term goals. An appropriate asset allocation strategy will also help you sleep better at night during turbulent markets.

If you are unsure about your own asset allocation strategy, please visit the Planning Calculators to find on-line tools or request asset allocation advice.

Our Current Recommendations

The models below are our current recommendations for short-term/conservative, moderate, and long-term/agressive investors.

Short-Term Strategy (0-3 years until retirement)	Moderate Strategy (3-10 years until retirement)	Long-Term Strategy (10+ years until retirement)

The Deschutes 401(k) Advisor is a quarterly publication educating 401(k) plan participants on the current issues related to retirement planning and investing.

Deschutes Investment Advisors is an independent firm dedicated to developing optimal strategies for corporate retirement plans, endownment and foundations, and individual investors. We can be reached at 503.223.2500.

Editor: Katrina Bell
Editorial Committee: MacGregor Hall, Bryn Torkelson, George Battistel, Ph.D., Dan Sholian, Jim Titus, Dennis Munsey, Diane Bella

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