Don't Give Up on Your 401(k)

We'll be frank: Your current plan of attack is probably the worst strategy you could employ right now. Yes, the market is sinking and you're losing money. And yes, few anticipate a dramatic turnaround anytime soon. But that doesn't mean you should quit contributing and start shuffling around what's left of your balance. As queasy as you may feel, you should stay the course.

Why? For starters, you mention that you plan to retire in 10 years. With a date this close, you should be saving like crazy in your tax-deferred retirement account. After all, the bear market has forced many would-be retirees to work longer or to make certain lifestyle adjustments to ensure that they'll have enough money to live on during their golden years. You don't want to be one of them in 2012. So unless you're confident that you'll have saved enough by then (our SmartMoney Retirement Worksheets can help with that), now is the time to be increasing your savings, not pulling back.

And your 401(k) is the best place to do it, says David Wray, president of the Profit Sharing/401k Council of America. Kaiser Permanente most likely offers some type of match. If your employer matches, say, 50 cents on the dollar, that's a 50% return on your new contributions right off the bat. We challenge you to find better returns in this (or any other) market. In fact, while your investments may be losing money, you may still be ahead of the game thanks to your match.

Then there's the tax advantage. Don't forget, most 401(k) contributions are made pretax, so by participating, you're lowering Uncle Sam's take, says certified financial planner (CFP) Scott Kahan, president of Financial Asset Management. While discontinuing your contributions might increase your monthly take-home pay, you could face a bigger tax bill than expected come April.

So do yourself a favor and begin participating again. If you're exceedingly nervous about current market conditions, you could always allocate new contributions to the plan's money-market fund or a stable-value fund (should your plan offer one). If you can stomach the thought of equity funds, remember this: Your 10-year investment horizon should give you enough time to ride out short-term losses, says CFP Dee Lee of Harvard, Mass.

And because you have at least a decade until retirement, we don't think you should be dramatically shifting your asset allocation, either — provided you were properly allocated heading into this bear market. (Our Asset Allocator will tell you if your portfolio is out of whack.) A general rule for determining a safe equity allocation is to subtract your age from 100. So if you're, say, age 60, then 40% of your portfolio should be invested in equities. These guidelines apply in both bull and bear markets.

Smart investing never feels all that smart at the time, says Don Cassidy, senior research analyst for investment-research firm Lipper. It demands that you don't move with the herd. Think about it: If you sell now and move into bonds — as so many other investors are — you'll simply be selling low after buying high. And with interest rates more likely to rise than fall, moving your balance into bonds right now could come back to bite you — particularly if you invest in long-term bonds.

Bottom line? This, too, shall pass. So don't give up on your 401(k). It may be a bit battered, but it's still the best way you can save for retirement. For more on 401(k) investing, visit our retirement section