Do I need to get out of my 401(k)?

In My Humble Opinion
1

I have never been very good at saving money, but I’ve been contributing to my company’s 401 plan for a few years now. I’ve been with the company long enough that I’m fully vested, and while I don’t have a lot in there yet (more than $10,000, less than $20,000), it’s important to me that it grow.

I’ve got my contributions spread out: A lot in bond-buying funds, the rest in medium-risk, (supposedly) high-yield stock funds. Nothing industry-specific or region-specific, to avoid the kind of volatility that can bring.

I know I’m in for the long haul, but watching the markets the last couple of weeks, and watching my 401 balance follow them, makes me nervous as hell. When this all stabilizes, will the Dow and Nasdaq have taken a permanent hit? Are the days of seeing the Dow at 10,000+, or even 9,000+, over for good? Would I be better off putting my money into another retirement instrument?

What I need to do, obviously, is find myself a financial planner, but what is the opinion of the Doper crowd?

2

The first question you need to ask is this: How old are you? If you are at least 10 years away from retiring, leave the money alone. Historically, the market has always rebounded in the long run. Even after many portfolios lost over half their value in the '73-'74 bear market, they bounded back. Don’t panic.

In addition, keep in mind that unless you roll the 401k into an IRA (in which case you’ll still be "in the market) you’ll be subject to taxes and penalties.

If you need the money sooner than that (i.e. you’re 60 and will need the money to retire in two years) then, by all means, see a financial planner to determine which is the best route to follow.

Zev Steinhardt

3

If you plan on contributing to your 401(k) for several more years, this period should fill you with nothing but glee. It was the last two years that should have made you sad, when you were buying stocks at inflated prices. Now is the time to buy, not the time to sell. Low stock prices = good.

Buy low, sell high!

4

Pretty much everything Zev said. If you are more than 10 years from retirement, you probably shouldn’t even be looking at your 401(k) balances. It sounds like you are diversified fairly well, which is good.
If anything, you may want to lower your company stock load (if you even have any). Many employers match in company stock, that’s what killed a lot of Enron and WorldCom people. Not that I’m saying your company is like those train wrecks, but individual stocks are much more volatile than funds.
As long as you are contributing every month, you’ll be fine. You’ll actually be better than fine, because when the markets come back (and they will), you will benefit from all the cheap investments you got now (dollar cost averaging and all).
Again, this assumes you are well diversified and greater than 5 years from retiring.

Funny how when stock prices drop 20% it’s called a crash, yet when just about anything else drops 20% it’s called a sale.

5

I don’t think you can just withdraw your money if you are still employed because you have not had a distributable event. I.e., you can’t say, “I want to take out all the money I personally put in and put it into my own IRA.” A 401(k) doesn’t work that way. If you have not had a distributable event and you withdraw the money, then you pay taxes and penalties on it. You can always stop making contributions to it, and open up your own IRA, but then you wouldn’t get any company match (if any).

Your plan most likely has a very low-risk fund, like a money market account. If you are really worried about the state of the stock market, you probably would want to transfer your balance into that fund. Even if you WERE allowed to withdraw and put your money into an IRA, you still have to pick a fund and they are probably no better or worse, stock-market wise, than what your plan offers.

6

You know, I feel really dumb – I never thought of it that way, that my contributions will buy more shares at lower prices while the market is down. (Hits self on forehead with “Clueless” stamp.) And I’m a looooooooong way from retirement. Like 30 years away.

I just get panicky about money because, well, my family has never had any. Among my immediate family (parents and sister), I’m probably the most successful financially, or at least on par with my father. I hate to think that the contributions I’ve been making might get pissed away by a bad market.

jk1245, my company is not traded, so no worries on that front. They do, however, have a very generous contribution-matching plan. There’s a pretty diverse array of options in the plan, too; I read through all the prospectuses and made decisions to the best of my ability. Still, I always worry that I’m putting it in the wrong places. [HomerSimpson]Stupid self-doubt![/HomerSimpson]

7

Some of my co-workers have stopped putting money into their 401k’s because they just cannot accept a loss. They have re-routed their previous 401k pre-tax contributions to insured instruments, post-tax.

It’s true that “at least they aren’t losing money,” but most cannot retire on post-tax contributions to insured instruments.

More than likely, this market will rebound before you retire and now is the time to buy some bargains. By the time the market starts a healthy recovery and the side liners get back in the market, the bargains will most likely be gone.

As stated previously, the only value that counts is the value of your 401k on the day you retire and if you are less than 10 years away from retirement, you probably don’t want to be too heavily into the market.

8

Sidetrack:

When I change my 401(k) allocation (i.e., moving a higher percentage of my contribution into more stable, less risky funds), am I just changing my FUTURE investments? Is there no way to shuffle the stuff I’ve already bought? That’s something I’ve always found confusing.

9

There are two ways to re-allocate. One is for your future contributions. The other is to re-allocate your existing funds.

10

phil and unfortunately many others:

You missed it. If you didn’t get out of the market 2 years ago, it’s too late. You might as well stay the course. Your funds will get better sometime in the future(but don’t expect it in the next few years).

And better probably doesn’t mean going back to gains seen in the boom years. 5-7% may seem like a bonanza in the future.

11

30 years from retirement? You should be in equity funds, and you probably should have some international and small cap exposure. Not much; maybe 15-20% combined. Your bond allocation should be low.

Adding shares when the price is low is called “dollar-cost averaging”. Generally a good thing for those with long horizons.

A mistake many casual investors make is putting money in when things are good, and taking it out when they are bad. When things are bad, it is time to investigate, not necessarily cut and run. When things are going up, especially quickly, a fall will follow. I watched one too many family members who didn’t listen to my “take what you got and git” trying to get a few more %age points on their already inflated investment. Sure, I advocated this well before the top, so they would have missed out on some appreciation, but they were too busy listening about how everyone else was making money for reason to kick in (and let’s not go into detail about the friend who became a day-trader; what a wreck).

Anyway, what I’m trying to say is don’t time the market. Think about how your money is allocated between stocks, bonds and cash. In stocks, think of how that is allocated. Look for low-cost, broad funds among your choices. And take advantage of any free advisor services your company may offer (many large firms now hire web-based portals for this) to determine your ‘risk budget’ (how much risk you can personally handle) and to their suggestions on how to allocate money amongst your choices.

One more suggestion: With thirty years to retirement, you should put EVERY LAST PENNY you can into your retirement fund. Scrimp in other places, but take full advantage of the time value of money. The more that can be invested earlier, the bigger the pot will be thirty years from now.

12

D Odds is right that saving while while you’re young is a good idea. However, I won’t go so far as to say that you should put every last penny in your retirement fund.

The key to life is balance.

When you’re 60 you probably won’t be able to waterski or snowski. Do it now while your body is cooperating. If you have young kids, go on vacation with them now. They’ll be gone soon and you’ll NEVER get that time back with them.

Pity the fool who wants to retire at 50. He has lost sight of the present. Also pity the fool who doesn’t save a dime for retirement. He has lost sight of the future.

Balance.

13

OK, the next question is: Who wants to help me decide if my money is going into the right funds? Seriously, my plan has about 30 different fund options, and while I have tried to allocate intelligently based on my understanding, the choices are a little overwhelming for someone with a limited understanding of finance.

If there are any CFPs reading the thread who’d like to offer some simple advice, I’ll gladly compensate you.

14

First off, if watching your portfolio decline is nerve-racking and causing you to have anxiety and stress, you shouldn’t increase the equity portion of your portfolio, even though you have a 30-year time horizon. Some people are just naturally risk-averse, and if you’re in this category I wouldn’t sacrifice sleeping well for the next thirty years in order to be eating well during retirement.

That said, it’s also very possible that your nervousness is due to your lack of knowledge with regard to investing. If you read a few books and gained a better understanding of the subject matter, no doubt you’ll feel more comfortable with the process of investing and the volatility that comes with it. There are dozens of good books out there, but there are also thousands that are absolute crap, filled with titillating but vacuous get-rich-quick schemes. Fortunately, one of the best books I know of is available for free on-line, Frank Armstrong’s Investment Strategies For the 21st Century. If you have the time and the patience to read this book and a few others, you may be in a position where you can do your own financial planning.

As a long-term investor, it is widely recommended that you ignore day-to-day fluctuations in the stock market because these will have virtually no effect on your overall progress. I think this may be a little naive, though, as it is almost impossible to tune out the relentless shit-shower of up-to-the-minute coverage by the financial media, unless maybe you’re holed up in some sort of Unabomber shack in Montana or something.

The stock market is now down about 45% from its peak in March of 2000. However, I still wouldn’t consider stocks to be at bargain prices, as they are still very highly priced by any reasonable valuation metric (I gave some specifics in this thread). But market-timers have an absolutely abysmal track record, as documented by the Hulbert Financial Digest, and if you were to jump out now because you believe valuations are too high you would run the risk that you never find an entry point, thus missing out on the next bull market entirely.

As far as asset allocation goes, that will depend on your willingness to take risk as well as your need to take risk. But a good starting point might look like either the Coward’s Portfolio or the [Vanguard Balanced Portfolio](http://www.fundadvice.com/portfolio.html#vanguard balanced).

15

I just told my son that he should just use his age and minus that from 100 to figure how much to put into the stock market at any time.
If you’re 30 years from retirement, then we’ll assume you’re 35. 100-35 = 65, so 65% of new contributions should be to the market. You should rebalance what you’ve already contributed to acheive this mix too.
Simple, stupid, easy to follow rule. It’ll keep you out of hot water too.
Don’t know what to do with the non-stock portion, though. Bond funds never seem to make any money, or they never have for me, anyway.
We have GICs in our 401(k) plan. They earn about 5-6%, but the principal is not in any way guaranteed.

16

PLD:

No CFPs, Registered Representatives, or Investment Advisors may disclose that they are such over the internet. It’s licensing thing.

One thing to remember about bear markets:
They end. When they do, you usually get a very short, sharp, but significant uptick that lasts anywhere from a few days to a few weeks. You got to wait for that, otherwise there was no point in your being invested. Over the next 30 years you’ll probably go through this 3 or four times.

One thing you might want to consider is that a lot of the risk is out of the stock market. Great companies are trading as if they were nothing but crap. Your risk in the short term is still extreme as the markets are volatile, but in the long-term, the risk for high quality stocks purchased or owned at this point is laughably small.

Where the real risk is is with bonds. Bonds are as inflated now as stock were in 1999. Bonds can and will go down, and they carry risks every bit as severe as stock. Interest rates will drive bond prices down faster than a two dollar whore. You have currency risk, inflation risk, and some very real market risk that is yet to filter down from the stock market (When companies get in trouble, their ability to make good on their debts becomes a serious concern.

My advice is to diversify. Someone in your position is really looking for long-term growth and able to accept considerable risk to get it. Think somewhere around 80% stocks 20% bonds. Keep your bonds short term, very short term.

You want to diversify across style as well. Own a 50/50 mix of growth and value funds, and be sure you’re represented in largecap, midcap, smallcap and international stocks.

Currently, I like a stock position that is about 50% large cap value with income. Try to buy funds that buy large corporations that pay increasing dividends, and try to buy those stocks at a bargain.

Bite the bullet, and buy about 10-15% in a couple of tech funds (stay with moderate ones, not aggressive ones)

Get another 20% or so in large cap growth in 2 or three funds with different styles and philosophies.

5% each in international and small cap (Don’t confuse international with global.)

Look for funds with at least a five year track record, with continuous management. Pick one that is in its top quartile of its group for the most consistently long time, and avoid funds that have style drift.

Or, post what funds are available. I’m sure I and the teeming millions will show you a few favorites.

17

Scylla said

While I value your economic analysis usually, this would seem to be hyperbole to me.

Do you mean that a GinnyMae bond fund could drop 50%? Many stock certainly did in the last 2-3 years, but don’t bond funds tend to have high/low ranges in the 10% area. Maybe 15% at the outside?

I would concede that if interest rates went double or something stupid, that all bets might be off.

18

Just remember, if you haven’t sold, you haven’t lost anything.

19

Samclem:

Depends on the GNMA fund. Besides, interests doubling in the next year or two seems a pretty safe bet.

Check your bond fund’s performance in 1999 which was a horrible year for bonds, and see how they did.

And, no. It’s not hyperbole.

20

That’s a dangerous misconception.

If you buy a stock and it goes down, you’ve lost the opportunity to have placed that money somewhere better.

The money that you’ve lost is gone, by any measure.

If you look at it your way, you are likely to hold stocks that fall into the toilet, and just keep going.

The best way to do it is to consider that money gone, review your positions, and determine where the best places are to make money from here, according to your time frame and risk tolerance.

If that’s your current holdings, so be it. If it’s not, you should get where you need to be regardless of your current losses (obviously your tax situation may effect this.)

The market does not care what your cost basis is.
If you disagree would you like to buy some of my Enron at $50?