The recent bear market gave many investors a real jolt right in the pocketbook. It clearly provided a wakeup call for those of us who invested heavily in tech stocks and failed to maintain a well-diversified portfolio. In hindsight, of course, all of us “should” have been able to see the impending market meltdown. In reality, however, timing the market is virtually impossible. The experts can’t do it, I can’t and neither can you. So, having cried over our spilled milk, now is the time to move ahead in a positive, constructive way to achieve our investment goals.

For most working Americans, stock ownership (primarily through mutual funds) has or will become their largest asset. The reason is simple. Most workers are depending on receiving retirement income from their 401(k) plans and individual retirement accounts (IRAs). While 401(k) and other retirement plans offer opportunities for investment in money market mutual funds and bond funds, the performance of these funds over long periods has been relatively poor. Over long periods, investments in stock have proven superior to bonds and money market funds. Consequently, on a long-term basis, stock mutual funds will remain a primary area for investment. (Of course other investment opportunities such as investing in real estate or collectibles are available, but these usually require day-to-day hands-on management and must normally be funded with non-tax-deferred funds.)

Priority One: Persistence and Perseverance

Having lost money in the stock market, some investors are avoiding stocks altogether. Some have been burned badly. The severity of the burn, however, is usually directly related to their lack of portfolio diversification rather than from investing in stock. The pain notwithstanding, remember the first rule to accumulating wealth is to invest regularly! Continue to fund your 401(k) plans and IRAs even though they may have taken a big hit.

Generally, it is best to avoid the temptation to move funds currently invested in stock funds to bond or money market funds. Don’t buy high out of greed and then sell low out of fear. If history is any predictor of the future, markets recover and move ahead. Bulls follow bears. I recommend that you continue or, if possible, increase your pension contributions and continue to fund your IRAs. Persistence and perseverance are two important ingredients to achieving your long-term financial goals.

Reassess Your Savings and Investment Strategies

Learn from past errors. For those who lost heavily in the recent bear market, reassess your investments and be sure to diversify. Since the bulk of your holdings are probably in your 401(k) and IRAs, examine these as a group each time you receive your quarterly statements and be sure the investments represent a well-diversified portfolio. If appropriate, reallocate your contributions or move funds within the plan.

I like to keep the bulk of my pension funds in a broad-based stock index fund while also keeping some in growth and global stock funds. I shy away from bond funds and particularly so during periods when interest rates are low (as they currently are) because when interest rates go up (and they will), bond prices go down. If you are considering investing in a bond mutual fund, inquire about the average portfolio maturity. The shorter the maturity, the lower the interest rate risk (risk that the bond prices will fall appreciably when interest rates increase).

Many workers make the common mistake of holding significant shares of an employer’s stock in a 401(k). Some employers provide matching contributions using their own stock and require employees to hold the stock in their plans for a designated period or forfeit it. Once the period has elapsed, however, consider moving your funds that are invested in your employer’s stock into a stock mutual fund. Unless you are privy to solid insider information that indicates your employer’s stock will really appreciate in value, I recommend maintaining a maximum of 10 percent in your 401(k). Diversification is very important to achieving your long-term financial goals.

One time-proven way to diversify your portfolio is to invest in a variety of index mutual funds. The goal of index funds is to mirror a stock index such as the Standard and Poors 500. Unlike actively managed mutual funds, index funds do not employ high-paid portfolio managers and tend to have minimal portfolio turnover (thus saving on transactions fees). Low-cost index funds may have annual expenses as low as 0.14 percent compared with the average annual expenses of actively managed stock funds: 1.45 percent. In addition, actively managed funds are likely to incur transaction costs of 0.50 percent. Over the long term, this handicap makes it very difficult for actively managed funds to beat index funds.

The information and planning ideas contained in this article are for general use only and may not be appropriate for all readers. Therefore, the ideas presented here should be relied upon only when coordinated with professional financial and tax advice.