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February 7, 2012

Where did your investments spend the last three years?

It's three years and one quarter since the banking crisis of September 2008. The housing market had already started to decline at that time, but nothing recently has hit us as fast and as hard as the loss in stock values following the failure of Lehman Brothers. This was also a time of significant loss of confidence in the market, in banks and in rating agencies.

Many investors panicked and pulled out of the stock market and sat on the sideline in cash. What did you do at the end of 2008? Did you liquidate your investments? Have you remained completely out of the stock market since? Was retirement the purpose of your investments?

Fortunately, enough time has passed now that we can look objectively at the results of investor behavior since late 2008, especially among those nearing retirement — those who feel the most vulnerable. After all, if what they have taken a lifetime to save seems at serious risk just about when they become dependent on those savings, they may easily panic.

The bottom line for prospective retirees is dramatically distinct between those who remained in appropriately diversified portfolios and those who went to cash, according to a recent study published by the Society of Actuaries.

With "modest increases in savings combined with slightly delayed retirement," pre-2008 retirement outlooks would recover if investors stayed in appropriately diversified portfolios.

"Investors who moved to all-cash portfolios, on the other hand, have more work to do to get back on track ... these are likely to have to delay retirement as much as four years above and beyond the steps needed to recover from the 2008 downturn had they stayed in" appropriately diversified portfolios.

An investor could recover from the 2008 downturn by either saving more or working longer. Of these two options, working longer, say, 1.5 to 3 years, will more viably get an investor the pre-2008 retirement income desired. But this assumes continued and appropriate exposure to the stock market.

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