Sunday, October 19, 2008

Time to Dump Your 401k? Don't Be a Moron...


It's mid-October, that time of the year when your financial advisor sends you your 401k statement for the 3rd quarter. The financial crisis came smack dab in the middle of the end of the quarter, so I'll first give you the bad news: The statement you are getting isn't going to tell you actually how bad your 401k is doing today - it's probably worse. That statement is from September 30th, before the real crash came. But, chin up....
All this bad news may may you want to dump you 401k, and throw the cash under the bed. Don't do it... Now before I tell you why, I will disclose one thing - I don't have a 401k. I have before, but I've switched jobs so much that I'm not eligible. But, my 401k was non-matching (Thanks Enterprise !!), and that is the key...
When you're looking at that statement that tells you that you lost 10% or 20% in the 3rd quarter, you may think that you lost your money - but the fact is it isn't your money that you lost. Most employers match 50% of your contribution, so before the stocks or bonds are even bought, you made 50% on your investment. So, even if your investments drop, you make out. in short, YOU CANNOT LOSE on a 401k. Unless you are a total dunce and invest in Pet Rocks, you will make money big time.
The good news is that the worst is over. Sure, the market could and may drop a bit more in the next few months, but it will be based on actual economic numbers, not fear of what MIGHT happen. And eventually, things will go back up - and your 401k will explode. There are plenty of strong companies with undervalued stock now. They will bounce back, and so will you. Warren Buffett, the richest man in the world, is investing in American stocks right now. Who are we to disagree with him???
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10 comments:

bobby said...

well, i believe Buffett can afford to lose a few bucks in the stock market.

Mike Reino said...

Hey, that's how he got it. The guy knows when to buy and sell, and if he's buying....Then again, by buying , then telling you about it,so you buy too, he makes money too. The guy's a genius.

Earl Capps said...

Things are cyclical. What goes up will come down, and then it will go up again.

Even the worst 401K plan grows slightly in the long run, but if one does a little homework and is willing to ride the waves, a long-term annual rate of return of 5-10% a year is easy to achieve.

My plan was holding an average growth rate of 25% a year for the last five years. That precedes the last boom, so it will probably get on track after a while.

If anything, this is a good time to increase 401K withholding - buy cheap and wait for the market to recover.

Mike Reino said...

Wise words indeed, Earl. If you can show me a program where you are guaranteed to make 50% return on your investment on top of that 5-10% like a 401k, I haven't seen it.

want a cremated hot dog moye said...

Buffet may be smart at stocks but remember he backe Clinton female and Obama

Mike Reino said...

That's true. Knowing who to ask about what is always important. I'll trust my own judgement as far as politics goes...

Earl Capps said...

John Hancock's energy fund is where I've put my money. Even during the current slump, global energy demand is continuing to increase.

With China and India still growing 5-10% annually, that's a lot of power plants, dams and energy infrastructure that is needed. My hard earned bucks help pay for it, and they pay me well for the money.

west_rhino said...

Managing Berkshire Hathaway is where most of Buffett's has grown. That fund doesn't exactly invest in stocks, it tends to buy out companies that are doing well, whether publically traded or not, like Blockbuster or Pampered Chef.

Dave Ramsey has a strategy of using four different areas to invest in mutuals, but cautions that those are for THE LONG TERM. Ditto the 401K, though if it is in shares of your employer's stocks, divest at your earliest convenience, your employer is able to issue more on a split, not unlike the Fed printing more pieces of green paper...

Manarin said...

Awhile back a group of researchers from Dimensional Fund Advisors reviewed the performance of the S&P 500 from January 1970 to December 2006. The annualized return for that period was 11.1%.

But here is where things get interesting.

When the researchers removed the 25 best performing days of the market over that 36 year period (less than one day per year), that 11.1% return dropped to 7.6%. A HUGE difference!

So what does one learn from all this?

First, tell your friends and family to quit making short-term changes to their investment strategy based on their emotions. They are foolish if they do. Woe onto anyone that thinks otherwise.

Mike Reino said...

Unless you are able to predict those 25 days over 26 years, you are correct. We try here to instill a patient attitude towards finances.

Investing is like being married - not all days are great, and some days can be God-awful. However, in the end, you need to stick it out.


I think my ex-wife told me that...