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Should You Stick With Stocks?

Experts tell retirement savers to sit tight, avoid quick sell-offs

It's been an anxious few months for investors. Those nearing retirement have watched their savings erode as the Dow Jones industrial average slipped about 7 percent between April and June.

See also: Common retirement planning mistakes.

The drop reflects the souring economy. Unemployment has climbed back over 9 percent, home prices have fallen to 2002 levels, and the rate of U.S. economic growth has slowed. Meanwhile, European debt problems continue to rattle world financial markets.

With stocks wavering, is it a good idea for you to head for the exits? Most experts don't think so.

Many workers and retirees still have bad memories of what happened to their IRAs and 401(k)s when the Dow plunged 50 percent starting in 2007, after the implosion of the credit and housing markets.

Even though stock prices have regained most of that ground, workers are more worried than ever about retirement. In the 2011 edition of the Employee Benefits Research Institute's Retirement Confidence Survey, 50 percent of workers said they were either "not too confident" or "not at all confident" about being able to live comfortably in retirement. That's the highest level ever recorded in the survey's 21-year history.

Cooling on stocks

The Great Recession of 2007-09 has led retirement savers to cool on stocks. EBRI reported in November that just 41 percent of 401(k) assets were concentrated in stock funds in 2009, down from 48 percent in 2007.

But while stocks are inherently riskier than other investments, most financial advisers emphasize that over the long haul they provide much higher returns, helping retirement funds last longer.

"We believe investors near or in retirement need some exposure to stocks," says John Woerth, a Vanguard spokesman. "For example, the Vanguard Target Retirement 2020 Fund, designed for investors planning to retire between 2018 and 2022, has about 66 percent invested in stocks."

"The key to investing in equities is to determine how much exposure to risk makes sense" for an individual, says Steven A. Weydert, president of Weydert Wealth Management in Irvine, Calif.

Thanks to decades of market data and advances in economic science, he says, "today it's fairly easy to identify the right blend of risk and return for you — one that allows you to sleep at night while also providing you with the best chance at achieving your long-term financial goals."

There's a way to take advantage of the growth potential of stocks while deploying a shock absorber against nasty market jolts, says Ray LeVitre, founder of Net Worth Advisory Group, an independent, fee-only financial planning firm in Salt Lake City.

Next: What should investors nearing retirement know? >>

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