For those workers poised on the cusp of retirement, the stock market's recent gyrations raise a potentially life-changing question: What should you do with your 401(k) investment allocation?
A lot depends on whether you have other sources of retirement income stashed away besides your 401(k) employee savings plan, financial advisers said.
That will play a big part in whether you can afford to wait out the tech wreck.
Generally, people about five years or closer to retirement should pare back on high-risk investments, such as volatile technology mutual funds, and start putting some money in less risky, less high-flying instruments, such as bond funds, financial advisers said.
"Clearly, as you're getting closer to retirement and need to convert this chunk of money into a stream of income, you need to give some serious thought to reducing risk," said Ted Benna, creator of the 401(k) and president of the 401(k) Assn. in Bellefonte, Pa., which represents 401(k) participants.
That's because the closer you get to retirement, the less time you have to recoup stock market losses.
That said, now is not the time to do it, some financial advisers said. Now would be the worst time for workers to make investment changes in their 401(k), said Scott Wood, president of True North Advisors in Dallas.
"Things are so far down and they could go down further," he said. "If you bail out no, you've locked in your losses."
And if technology stocks come back, "you've locked yourself out of those awards," Wood said.
"You always want to make an asset allocation change from a position of strength and not from a position of weakness."
Keep a diversified portfolio
But that doesn't mean you shouldn't use market rallies to reduce your risk, said Douglas Gill, a certified financial planner.
"A retiring person should seriously consider broad diversification across all asset classes to avoid what happened in 2000," Gill said. "You cannot afford substantial declines in value because you have less time to recover."
As a rule of thumb, if you're approaching retirement you should have 50 percent to 60 percent of your money in a diversified portfolio of stocks, 20 percent to 30 percent in bonds and the rest in cash, said Clay Singleton, a vice president at Ibbotson Associates in Chicago, a financial consulting firm.
"It would be time to have a well-balanced portfolio that was best-suited to producing income, a stable income over time," he said. "Technology stocks and a portfolio which is heavy in technology stocks are so volatile that you really can't depend on them for income."
And you should use market rallies to reduce technology holdings and reinvest the money in more diversified investments, Gill said.
"If you're a year from retirement and you have a lot of technology, you should be using any rallies in the values of those securities to be lightening up on them and redeploying that to other areas of the market," he said. "You should not be selling out of all your technology, but rather, you should always make changes incrementally."
Joan Gruber, a certified financial planner, agrees.
If workers are going to start taking money out of their 401(k)s immediately, she said, "they need to have some technology, but a great majority of their portfolio needs to be in the seasoned, older companies that pay dividends, and bonds."
Holding on to some of those technology investments isn't a bad strategy, Wood said.
"Even if you're a 401(k) investor, it's perfectly fine to still have some of the portfolio in more aggressive assets," he said. "The mistake that a lot of people make is, 'I'm retiring at 60 and I need this money when I'm 60.' You only need a small portion of money when you're 60."
Those with 401(k)s should remember that they'll probably live another 20 years or 30 years after retirement, so they'll need to make their money last, Wood said.
Other sources of income?
Whether you can afford to wait out tech investments depends on whether you have money stashed away separate from your 401(k), financial advisers said.
Do you have other savings? Are you expecting traditional pension benefits from your employer? How much will you get from Social Security? Do you anticipate a fat inheritance?
"How dependent are you on that 401(k) money for your retirement?" said Scott Lummer, chief investment officer at mPower, a provider of online investment advice to participants in defined-contribution plans, such as 401(k)s. "If you can accomplish your goals without touching a lot of that 401(k) money, the situation isn't nearly as critical."
But if that's your only pot of retirement funds, you need to start cutting back on technology holdings, experts said.
"If you're within five years of retirement, if the market took another big hit, you have very little flexibility," Lummer said.
If you stay the course and the market deals another blow to your 401(k) investments before you retire, you can try to alter your plans, but it would be hard to do with so little time, he said.
"You can work longer, you can cut down on your expenses and invest more, or you can plan on spending less in retirement," Lummer said. "The closer you are to retirement, the less control you have over those levers."
Ask yourself whether you can still afford to retire as you planned, given what's happened in the market.
"They could still be on pace to retire because of all the gains they've reaped in the past three years," said Peggy Everson, senior financial adviser at American Express Financial Advisors in Richardson, Tex.
But if you have other financial resources and can tolerate more ups and downs in the market, you may not have to cut back so sharply in tech stocks, Gruber said.
"If you can't afford to stay where you are in the next five years, you've got no business being there," Gruber said.