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Investing amid crisis
Should you still be wary of the stock market?
Millions of American workers lost an aver-
age of 27 percent of their 401(k) retirement
savingsin2008,accordingtoastudyreleased
this morning by Fidelity Investments.
The average 401(k) balance went from
$69,200 in 2007 to $50,200 last year be-
cause of dramatic market declines, the study
found.
Despite such losses, Fidelity's analysis of
11 million participants in more than 17,000
corporate plans showed that employees
continued to contribute to their retirement
savings and took out fewer loans against the
plans than in the previous year. In fact, they
added an average of $5,600 in pre-tax earn-
ings to their accounts, a slight increase from
the year before.
"Employees are staying the course, and I
think this is very good news because I think
it really shows that employees recognize
these savings dollars are a need to have, not
a like to have," said Scott David, president of
workplace investing for Fidelity Investments.
"This is a necessary savings for their financial
well-being."
But in a sign that workers are struggling
financially, the Fidelity study showed a slight
increase in the percentage of workers who
took so-called hardship withdrawals, from
1.6 percent in 2007 to 1.8 percent in 2008.
Unlike 401(k) loans, hardship withdrawals
require proof of a severe financial need and
come with a hefty tax bill.
David said the people who took hardship
withdrawals most likely did not have the op-
tiontotakealoanagainsttheirplans.Histori-
cally, those who take hardship withdrawals
have taken out loans first and many employ-
ers restrict the number of loans allowed.
--The Washington Post
401(k)s take a hit, but people still contributing
I
t would be nice to think the stock market
couldn't possibly take another drubbing
like it did last year, when the Dow lost al-
most 34 percent.
While back-to-back losses are not common,
they do happen.
Since the 1920s, the Dow has fallen in two
or more consecutive years four times: in 1929
through 1932, in 1939 through 1941, in 1973 and
1974, and in 2000 through 2002.
Some market watchers say another drop this
year is unlikely because last year's was so swift
and deep. "It usually takes a lot longer to go
down the amount that it has," said Jason Thom-
as, chief investment officer with Aspiriant, a
San Francisco wealth management firm.
From the market's peak in October 2007
through its trough in November 2008, the
Dow lost 47 percent and the S&P 500 shed 54
percent.
"With the exception of the Depression, that's
the high end for a bear market to retrench,"
says Matt King, chief investment officer with
Bell Investment Advisors in Oakland, Calif.
"That doesn't mean we are headed into another
depression."
King says there are many differences be-
tween then and now.
In the 1930s, the government and the Fed-
eral Reserve raised taxes and interest rates, let
the money supply shrink and threw up trade
barriers.
Today, they are slashing interest rates, flood-
ing the market with money and lining up specif-
ics for the mother of all stimulus packages.
It's going to take awhile before all that kero-
sene ignites the economy. Nobody is predicting
a quick upturn.
"It will be a difficult year," Thomas predicts.
"We are likely to see bad and in some cases
worse headlines." But he says this is typical at
the end of the bear market. "It truly is a case of
it being darkest before the dawn."
The stock market generally turns up six to 12
months before the real economy, and investors
who wait for the all-clear signal before getting
into the market will have missed most of the
gains.
"If you wait until companies start hiring,
you've missed the movement in the financial
markets," Thomas says.
The trick is figuring out when the recession,
which started in December 2007, will end. The
Great Depression lasted for 43 months. Since
then, there have been 12 recessions, averaging
10 months in duration, according to the Nation-
al Bureau of Economic Research.
The longest -- 16 months each -- were in
1973-75 and 1981-82.
Economist Ed Yardeni
of Yardeni Research says
there is a 60 percent chance
that the recession will end
around midyear.
But he also says there
is a 40 percent chance we
are headed for a prolonged,
Japanese-style recession.
The problem is that "you
have a tug of war between
deflationary and infla-
tionary forces," says Carl
Kaufman, who is in charge
of fixed-income investing at
Osterweis Capital Manage-
ment in San Francisco.
For now, deflation is the
bigger problem, brought on
by deleveraging. As credit
gets tighter, companies and individuals must
sell assets to repay debt. That causes asset
prices to fall, which forces them to sell more
assets to pay debt, causing prices to fall more.
As prices come down, businesses and consum-
ers postpone purchases, and that prevents the
economy from growing.
"In Japan, deflationary forces got totally en-
trenched," Kaufman said.
To combat deflation, the Fed and Treasury
Department have been throwing every type of
stimulus they can at the problem.
If their war on deflation succeeds, the econ-
omy will recover, but the side effect could be
hyperinflation.
King is also concerned about inflation but
says now is a good time to invest in conserva-
tive companies that could benefit from consoli-
dation as the economy shakes out.
"We are sticking with large-cap names with
good balance sheets, low debt and a consis-
tent record of paying dividends," he says. "We
are looking at consumer staples, like Proctor
& Gamble, and companies that sell them, like
Wal-Mart and Costco."
Prefer mutual funds? Russ Kinnel, Morning-
star's director of fund research, recommends
some fine funds that reopened to new investors
last year, such as the Sequoia Fund, Longleaf
Partners, Dodge & Cox Stock and Causeway In-
ternational Value.
He also likes the Jensen Fund, which focuses
on blue-chip companies that aren't very depen-
dent on banks for financing.
Charles Biderman, chief executive of Trim-
Tabs Investment Research, says he won't be
buying stocks until he sees corporations buying
back their shares. "The house knows what is
going on," he says.
"At market bottoms, they are buy-
ing. At market tops, they are still
selling." He notes that an-
nounced buybacks were
down more than 90 per-
cent in December 2008
compared with December
2007.
--Kathleen Pender
San Francisco Chronicle

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