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Preparing for Retirement in a Rocky Market

It's a scary time, but the experts advise against running away from equities.

Perhaps you have four years, or 12 or 17, until retirement. Whatever the amount, the fear is there: You won't have enough money to stop working.

You should have saved more, you should have sold those tech stocks -- but now it's too late. Everything has changed. Recession, war and unemployment: these are the watchwords now. The past two years have beaten up any 401(k) plan.

Dow 10,000

is a relic, gathering dust in your attic.

So what do you do?

"It's a good time to invest," says John Eckel, president of Pinnacle Investment Management, a Simsbury, Conn.-based asset management firm. "It's like going to the supermarket and everything's on sale."

Indeed, price-to-earnings ratios have dropped significantly. A year ago, the average P/E multiple of the

S&P 500

was 26.5. Now it is 21.5.

Although not all financial planners advocate pushing new money into equities, most of those interviewed for this story have advised clients to hold on to existing stocks -- one way to counteract the eroding effect of inflation. Even though the current rate is only at 2.5%, falling interest rates have historically boosted inflation.

Rising prices are like high blood pressure, Eckel says. You won't notice the results from one day to the next, but 10 years later, you're much worse off.

So pull out your retirement portfolio; it won't be too difficult to position it for an uncertain future. "Think about what it will be like without any plan at all," Eckel says.

Step One: Peek at the Portfolio

Many people have too big a stake in one company. "Many different funds all have the same stocks," says Steven Ames, the principal of Ames Fee-Only Financial Planning in Annapolis, Md.

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So check your portfolio and eliminate most of the overlap. Choose one, and only one, high-growth mutual fund. Choose one semiconductor stock. Prepare to invest in a variety of sectors, asset classes and investment types. It's better to be in many places at once than in one place at the wrong time.

Step Two: Pay the Piper

Now that you've identified candidates for expulsion, it's time to look at your bank account and credit card bills (even if you'd rather not).

If you leave $5,000 on a credit card, you could owe $5,900 in a year. That same $5,000 might not get you $900 in the stock market. So it's better to pay off any credit card bills before you accrue interest, rather than chance earning money in the market.

Credit card debt also suggests living beyond your means, a situation that would require tighter belts and purse strings in a prolonged recession. "It's always nasty when you have to go back and correct your lifestyle," she says.

Step Three: Procure a Professional and a Plan

With so many investment options, fixing a portfolio is a daunting task even when the market is good. "A good adviser is a lot like lithium," says Ron Carson, president of Carson Feltz Wealth Management Group, based in Omaha, Neb. "They keep you stabilized."

Take-charge kind of people run investment ideas past financial planners, while others just put their money in someone else's hands. Using a professional can keep the lazy diligent and the fussy calm.

"The worst thing is to not have a plan," Carson says.

Step Four: Ponder Plenty of Possibilities

By now, the portfolio should be plucked, the bills mostly paid and a professional consulted. It's time to put that money to work so you won't have to. There is only one rule to remember: diversify.

"Do what the big smart money does," says Glenn Frank, a partner with Tanager Financial Services in Waltham, Mass. Professional managers use a diverse array of investment options. Those who do not abide by this cardinal rule, unless lucky or truly savvy, are doomed to learn it the hard way. And because this economy is so uncertain, placing a bet on a single kind of investment, market sector, or worse, stock, is a risky proposition.

More specifically, most financial planners suggest dividing your investments in the following way: 30% to 60% in stocks, 30% to 50% in bonds, and 15% to 40% in a money market fund.

As you near retirement, Ames suggests avoiding tech stocks and investing in more stable sectors such as health care, financials and energy. Eckel says he likes investments with low volatility, such as merger funds that exploit the price differential in two merging stocks. Lau suggests staying with mutual funds over individual stocks. Frank warns against putting too much emphasis on fixed-income investments and missing a possible recovery in stocks.

The bottom line of all of their suggestions -- diversify.

Step Five: Practice Patience

Losses can be scary, and sometimes, as in the past 18 months, people need to make changes. But experts advise against resisting the urge to tinker too much.

"The more you trade, the lower the return will be over your lifetime," says Carson, before ticking off the many charges, fees, penalties and taxes associated with the frequent movement of capital. "You've got to make a lot of great moves to offset those risks."