Dear Dagen: Getting a Grip on Your Portfolio

There are no easy answers for this lousy market.

And there is no one plan or asset allocation everyone can use -- the financial equivalent of a pair of pants with an elastic waistband.

However, there are the basics that investors must remember as the market plunges -- or soars, depending on the day. The basics vary depending on your age bracket, but the key is sticking to them, bull or bear market.

If you're looking for perspective in these crazy times, hopefully these thoughts will help.

A Long Row to Hoe

If you're in your twenties or thirties, you have decades to invest. When you're socking away money for your retirement, you can keep most of your money in stocks -- assuming you can actually stomach the short-term swings.

No one should expect to see 15% returns from the stock market every year. But you can expect to make more money in stocks than in bonds over the long haul. The 11% annualized return on the (VTSMX)Vanguard Total Stock Market Index fund, which tracks the Wilshire 5000 index, over the past 10 years easily beats the 7% return on its (VBMFX)Total Bond Market Index fund.

Stay in the market. But keep some of your cash in bonds to reduce the fluctuations in performance. If you want a moderately aggressive portfolio, Charles Schwab suggests keeping 80% in stocks (spread among large, small and international), 15% in bonds and 5% in cash. Looking at the period from 1970 through the end of last year, that mix produced an average annual return of 11.6%, compared with a return of 7.5% for a portfolio of short-term bonds and cash.

Baby Boom to Bust

If you're in your forties or fifties, you probably still have a decade or two until you retire. But the older you are and the closer you are to retirement, the less money you should have in stocks.

Unfortunately, many people have learned the hard way over the past two years the perils of overexposure to stocks, especially volatile growth stocks. A useful guideline: If you are absolutely going to need this money in the next 10 years, it shouldn't be in the market. (Think liquidity: bonds or money market funds.)

Many people may need to dial back their allocations to stocks. A 60/40 split between stocks and bonds is a solid plan for longer-term investor who doesn't need current income from the portfolio and wants growth from those investments.

You should also pay careful attention to how much money you still have in your own company's stock. The collapse of companies like Enron has been disastrous for the retirement plans of employees. At one time more than half of Enron's 401(k) was in the company's stock, and employees weren't allowed to unload the shares they received as matching contributions in that plan until they hit age 50.

A new study by consultant Hewitt Associates found that 29% of 401(k) plan participants still had at least three quarters of their plan balances in company stock in 2001. About 15% of participants had all their of their balances in company stock.

Thankfully, some companies, such as troubled telecom outfit Qwest Communications (Q) have been loosening their restrictions on moving out of contributions received in stock.

If you can reduce your exposure to your own company's stock, you should jump at the opportunity. Your livelihood is directly linked to your company's success or failure. You don't need the majority of your retirement money riding on the company's fortunes as well. If that company falls on hard times, you could lose your job and your nest egg.

I suggest you can keep about 10% of your retirement money in the company's stock. In some cases, it might be OK to have more, say if you've worked for a stable company like Wal-Mart for 30 years. But the point is to view your company's health and growth prospects as dispassionately as you would any other investment.

Saving More

If you're very close to retirement or already retired, your actions might have to be more drastic.

If you've still got money in the market that you cannot afford to lose, you should take it out. At this point, there's no need to risk losing any more. And you should get rid of your riskiest bets first.

The savings rate in this country right now is a rock-bottom 3.1%. But many people are going to have to alter that behavior to make up for money they've lost in the market that they may not regain before they retire. That means you might have to change your spending habits to make up for what you lost in the market, giving up smaller and bigger luxuries.

The mantra for the rest of the decade will be: Save more and spend less. And that's difficult to do regardless of your age.

>To order reprints of this article, click here: Reprints