Question about my 401k

[hearts and roses]

For anyone who understands all the mumbo jumbo about the markets, mutual funds, etc., and 401k's, can I get your educated opinion please?

I have a balance of about $12,550 in my 401k account. Our company matches whatever we put in at the end of the year. I am not putting a whole lot of money in there, roughly $200/month. But in my statements, it appears that for the past year, my investments are really tanking. They aren't all doing badly (they are spread between MF and stocks/bonds), but they are not really doing well. In fact, in some cases there are even negative numbers. I spoke with our benefits advisory company and they said to just leave the money in there and continue making my contributions.

My feeling is that right now, my money would be safer if it were in a shoe box under my bed. In fact, I was thinking that instead of contributing for 6 months, I could just squirrel the money away and then in the Spring, see where we stand and if the climate is right, set myself up again. Open enrollment is in January/July. Of course, I would not/could not withdraw the money already there - I'm just talking about dicontinuting the contributions for a while.

I am not panicking, I'm angry. Our advisors keep saying, "Don't panic, don't panic" but I'm not panicking. I'm annoyed that I'm making contributions and the bottom line numbers are not moving and, in fact, have gone down in some cases. Aggravating. For instance, last month my contribution was $160.00 but my balance only went up $27.58. What is up with that? Am I reading it wrong?

So, what do you think? Thanks~

 

[Shari]

I'm not sure investment advice is cool here, but if you beleive in the stock market, now is a "buyer's market". Before, when you put $200/month in, you bought, say, 10 shares at $20/share. Right now, you can purchase sometimes 20 or 30 shares for that same money because the prices are down.

The risk of this is if the stock that your fund invests in completely tanks, you will lose what you've invested. The beauty of a mutual fund is that your share represents holdings of several different stocks instead of just one, so to lose everything, everything your fund invested in would have to tank. The other risk is that the stock market will eventually rebound, laregely intact, and those who bought stocks and shares when the market was down will turn some major profits.

Its legalized gambling.

Personally, I am leaving my money alone - I'm not even looking at my retirement funds because, like you, I panic. I have 2 thoughts about this tactic...1) if I panic and pull my money, then I am contributing to the problem, and 2) surely, the markets will eventually rebound. But you have to do what is right for you.

 

[Marcie Mac]

I tell you Jo, the shoe box idea is one I have been considering for a few weeks. Honestly a few weeks ago, I was just thinking about closing the 401 K out, and opening a CD with the money. I talked to the advisors who manage the plan, went on line with the financial people they have available and everyone said leave it, and suggested I put 70% of it into the Money Market - I thought I would do that slowly and put in 30% and omg,the losses. I have pretty conserative picks,but had I moved it a few weeks ago, with the 20% Tax and 10% penality, I would have more money than I do today.

I have a feeling that my company is going to stop contributing - they did this before in bad times, but left the account open so we could put in our money. When things got better, they started up again.

I am not angry though - I am in a dead panic..

Marcie

 

[gcvmom]

Well, I echo Shari's advice. Now is when your money that goes in will go the farthest, and when the market eventually turns around, you'll realize much bigger gains. It's definitely not a time to sell in my opinion. Right now, your losses are on paper. If you are 10 or more years away from retirement, I'd tell you to stay put and hang in there, especially if you are getting matching dollars (AKA FREE MONEY) from your employer. If retirement is coming sooner, then you might think about putting FUTURE monies into lower risk vehicles like a MM or bond fund. But I still wouldn't be selling anything right now -- you'll really get burned in my opinion. I am NOT a tax advisor, so take my advice for what it's worth.

Just wanted to add, our household is feeling the mental pain over our investments as well. My husband's retirement account at work as dropped at least 25% since the beginning of the year! OUCH! But the way I look at it, some of the funds his 401K money goes into each month are at their lowest in many years right now, so that means when he makes his monthly purchase, we are getting a GREAT deal on them. And I know that historically, bear markets do eventually turn around. The problem is how long it will take and whether an investor's nerves can stand it!

 

[SRL]

If a serious recession hits and we do undergo rapid inflation, I think food staples under the bed would be of more value than money.

 

[Shari]

I'm with you there, SRL.

 

[Shari]

PS - often 401k contributions take some time between the time you give them your money and the actual share purchase shows up on your account. Its not likely that they make a purchase every single time you get paid (there is generally a per-transaction fee and doing that would eat a lot of money up just in fees).

 

[hearts and roses]

Thanks for the input.

I just want to reiterate that I have no plans of selling or emptying out my 401k to do anything with it. I would leave the monies currently in my 401k alone. This way when the market turns around, I will still have something to build on for the future. Incidentally, I have no plans to retire ever. Seriously - and its not only because I won't be able to afford retirement, which I won't, it's also about keeping my brain & body active forever.

What I am considering is ceasing to contribute until next year...for the time being I would put the money into the Orange ING online savings account, which yields almost double what a traditional savings does at my bank.

Then, when open enrollment comes around again, I can consider beginning my contributions again.

I am talking about building a nest egg of $2000. If when open enrollment comes around again, I can take the $2000 and put it right into either my current 401k or open an Roth IRA.

So what do you think of that plan? Am I being foolish? I get so many conflicting views.

 

[Shari]

That's a decision you'll have to make (or seek an actual financial advisor). Its a personal choice based on your beleif of what's going to happen to the markets.

While a big part of me wants to run for the hills, that "fear" is what is driving a large part of the mess we're in right now and its snowballing. I don't want to contribute to the problem, so I'm standing firm and continuing to invest my money in the markets as I did before. I also beleive in the American people and their brainpower. Someone, somewhere will find a niche, even in troubled times, and I beleive that eventually there will be a turnaround - thus, stocks/shares purchased now, while the market seriously hoovers, will gain tremendously in the long-term. Its how the free market works. Its how my grandparents made almost a million dollars by just investing a few spare dollars in and shortly after the depression.

Putting your $2000 away and re-investing later is safer. But it also a) feeds (in a small way) the market problems, b) even if invested later when the market is more stable, will not set you up for those large returns, and c) if we hit a true depression, money won't be much good if the goods aren't there to purchase or money no longer has value. But your idea is safer for you, barring the (c) condition happening (which I don't think it will).

I don't feel comfortable telling you what you should/shouldn't do, but I'm glad to tell you what I'm doing and why.

 

[Shari]

Another Ps - if you put your money in a savings account with ING, ING will take the money you deposit and will "invest" it in some fashion or another (its how banks turn a profit). Since they are offering double the interest rates of your local banks, they are betting that they can make even more than what they will be giving you on their investments. Just FYI in case you didn't realize that.

 

[muttmeister]

I am definitely NOT a financial expert but, if I were younger, I would contribute as much as possible to my 401K now up to the point where the company ceased to match what I put in. If you put it somewhere else, you lose the half the comany contributes. In a mutual fund, as most 401Ks are, your risk is somewhat smaller. Because the market is so low now, you are getting more for your money. If you have a few years to wait, you will "probably" come out way ahead. If you are my age and need the money in the next few years, it is a different story,.

 

[Nancy]

For what it's worth, Suze Orman said that we should NOT stop contributing to our 401K and we should contribute as much as the company will match. Even if it loses 50% we are still making money because of the company"s contribution. She is very adament about that. Also remember whatever you are buying now you are buying at a very low price so when the market increases so will your investment.

Nancy

 

[tiredmommy]

Also, you lose the tax benefit on that $2000 by putting it in checking account rather than a 401k. You will be presumably be taxed at a much lower rate when withdrawing after you reach retirement age, due to lower reportable income. So, pay higher taxes now, or tuck it away in an approved plan to lower taxes later.

 

[busywend]

Jo, people have to evaluate for themselves what they can stand to lose.

There are so many things to consider:

years to retirement
diversification of your investments
level of stress while watching your balance change

Everyone is different.
At 40, I am not stressing - many years to make up what is lost.
At 60 I would hope my investments would be such that they were secure and low risk so I would still not be stressing.
If I were 50, I would be in deep doodoo right now. Because I would be on the cusp of making some of my investments less risky and perhaps would have lost a ton in the last few weeks.

There are people that have lost hundreds of thousands of their retirement with only a few short years to try to make that up. Will be forced to do some high risk things when they are at the age they should be in the low risk pool. And therefore, stand to lose even more.

OK, of my soap box - I got out of control there for a minute.

Anyway, I think you should keep contributing and in fact next year you should be putting in much more than you are. Especially if your employer matches it. How much do they match up to? 3%? 5%? If so, put in at least that much.

 

[Fran]

I was going to say the same as Nancy.
Suze said to never give up free money. As long as they are matching your funds keep doing it. Once you reach the maximium and they don't match there are higher yielding something or another to invest your retirement in.
I am just sharing what I heard on the Suze Orman show. I have no expertise in this sort of thing.

 

[witzend]

I'm with Shari and GVC, et al. If buying stocks while they're tanking is good enough for Warren Buffet, it's good enough for me.

husband's "retirement plan", which we used to be able to control somewhat by deciding what "type" of investments went to what percentage just came up. We have been losing on the "safe" part of the investment for years. But we got notice this year that they weren't going to ask whether we wanted a "retirement plan" or a 401k plan every year after this so we really had to look at it. The week of the bailout... We decided to stick with the 401k.

We also put in a little above the amount that the company (owned by Warren Buffet) matches. The important thing to remember is that while there is risk, it will get better. It always gets better. You guys probably have close to or more than 20 years to retirement. Think of those 20 years between the recession of the 1970's and the 1990's. It can make a huge difference! And, your employer is giving you that matching money. It's not like he is going to give it to you if you don't put the money into the 401k. A 401k is government protected - for whatever that's worth.

My advice, keep the 401k, and look at it every year. It does go down sometimes, but you're getting an awful lot for your money this year.

 

[hearts and roses]

I do love Suze Orman. I think she's awesome and always right on with her advice. I spoke with our 'guy' and have decided to stick it out for now. See what happens and at least wait until the end of the year when our company matches what we've put in. I think they match at 3% and that is what my contribution is. Thanks again~

 

[trinityroyal]

A couple of things to think about...

1) Dollar-cost averaging (which is what you're doing Jo, by putting in approx the same amount every month)
This really helps you to get the best out of your investment by smoothing out the highs and lows of the market. Over the long haul, this is a really good way to maximize your investment because you buy more shares when the price is lower, and those shares increase in value along with everything else you hold in that stock or MF

2) Long-term view
If you look at the market over the long haul, the trend has always been upward. There have been peaks and valleys, some fairly significant climbs and corrections, but overall an investment that you bought 20 years ago will be worth more now than it was then. This is especially true for mutual funds, index funds, etc. where you're not gambling on the success or failure of a single business.

Statistically, if you look at long term investment success, staying in the market and not moving your money around too much lets you do way better than trying to time the market. Not only because you might miss a good opportunity by a few days or weeks, but also because each transaction incurs fees.

I'm with Shari in that when the market is volatile, I just don't look...

Trinity

 

[witzend]

We're lucky that husband's company matches up to 6%. When you figure that if you are putting in the 6% you're investing at least 12% of your annual income, it feels good. And it's pre-tax, so less taxes to pay. I think we put in 8% now. It doesn't feel as good when the value goes down, but what are you going to do? Sad to say, other than our house (which the value is also decreasing on...) that is our only real investment.

 

[Marcie Mac]

One correction I think, Witz - the 401 K does not fall under any FDIC rules that your money is safe and backed up by the Govt.