Why should I keep buying stocks in this market?

Factual Questions
1

This is a personal question, followed by a more general application.

What I often do in managing my own retirement account is wait until the autumn to make sure that I haven’t had any big unexpected expenses and, if I haven’t, then to authorize my HR people to withdraw a larger contribution from my paycheck into a Supplemental Retirement Account to the maximum annual amount allowed by law.

This system has worked out okay for me, though this fall, I wondered if investing in a half-stocks/half-bonds portfolio made sense what with the stock market tanking and all. I consulted my accountant who counselled me to continue taking out the maximum amount (if I didn’t need the cash, which I didn’t) because of the advantages of not being taxed on that portion of my income. Even if my stock holdings slipped, he said, that’s still the best place for any extra money–it’ll come back when the stock market rises.

So I authorized the change in my SRA. The woman I spoke to at HR said “Oh, yes, lots of people are stopping their stock accounts.” I told her, “No, no, no, I want to INCREASE my contribitions, not decrease them.” She told me to send in an authorization form and I did so.

Now I’m looking over my pay stubs for the past few weeks, and rather than seeing my take-home pay diminished, I found that it’s gone up, and the reason is that my SRA contributitions have been eliminated. Maybe HR misunderstood what I wrote them I wanted them to do? Weird.

Now the problem is what to do to correct it. I suppose I could get them on the phone and find out what’s going on, and try to correct it.

But maybe I should do nothing because the stock market has continued to slide and I’d be buying into losses if I persuaded them to correct their mistake? Maybe I should let this error slide and just keep the extra cash in my bank account?

In a more general sense, could someone explain the wisdom of investing in a falling market for the tax advantages? I still don’t understand, even if I’m saving on my federal taxes, how I benefit from investing in a stock portfolio that’s actually declining in value.

2

If you have the money, keep buying. Prices are getting cheaper every day, so you’re getting more and more SHARES per dollar. When those shares eventually go up, you’ll be aces.

In other words, 20 or 30 years from now, when you sell those shares, would you prefer that you had paid $10 a share for them in an up market, or $1 a share in a down market?

3

Buy Low Sell High. Right now it’s low so buy don’t sell. As the market loses value buy more. Even if a few companies go belly up, you will make it up on others that don’,when the market recovers. The only way you lose is if the entire country tanks. In that case you have more to worry about than worthless money.

4

If you believe that this is the end of the economy as we know it then you should not buy. If you believe that you should buy low and sell high and that the economy will indeed recover on a time course sufficient for your long term investment plans, then continued regular investment now, whether this is exact bottom, or still a bit more to go, or already beginning to recovery, is wise.

Obviously there are people who were prescient (or nervous) enough to pull into cash positions before the drop went too far. These people are unlikely to be risk lovers (sort of a selection bias) and will take some convincing before they jump back in. (Those who are risk tolerant stayed exposed and now have to wait it out but have little to invest with.) But they will come back in especially as there is not much else they can do with the money what with safety (T-Bills and mattress storage) offering no meaningful potential for return at all.

5

From my experience working in HR, I can share this. I am almost 100% certain that they would not be able to “turn back the clock” and make it as if you really did buy those stocks when you turned in the form. Even if HR acknowledges the mistake and you throw the biggest fit imaginable, the biggest exception I think it would be possible for them to make would be to add some flexibility so that you could contribute the full amount before the end of the year, or possibly increase your allowable deferral for next year. Mistakes in situations like this are ugly, and part of me says you should rake your HR over the coals for this type of screw up just out of principle (because next time the stakes could be a lot higher and they should be more careful). But I think once you get into the detailed Ts and Cs of the savings plan, you will see wording to the effect that they aren’t responsible for transactions that don’t go through.

6

You got good advice about buying now at these low prices, if you are young enough to wait some years for the market to recover.

There is a good chance that this slump may go on for years, and the govt. will continue to print more money to pay for the huge debts, and thus stocks and dollar value will decrease.

If you think this is a probability, you might want to consider buying gold, either coins or bars. It is always an idea to have about ten percent of your savings in gold anyway as a hedge against inflation. I plan to buy more than that, as am pessimistic about the future economic health of this country, unfortunately.

7

But the year isn’t over (yet) and I should be able to do something, I think, even possibly to contribute money out of my checking account to bring me up to the maximum allowable SRA, I think. I even (vaguely) recall that some situations (maybe not this one) allow me to allocate some of 2008 income for the first few months of 2009, but I could be misremembering. In any event, they should have a copy of my authorization form, clearly instructing them to take out additional SRA funds, and not to stop SRA deductions–it’s not as if this authorization is lost (I hope) or that it’s ambiguous in the least. My only real question here is whether I want to, and according to my brother whom I just spoke to, the stock market has actually made a recovery from it’s low (he thought the Dow was up around 8600 hundred today from a low of mid-7000s) so I guess I’ll ask them about this tomorrow.

8

If I wasn’t clear, what I mean is that they are unlikely to be able to make it literally as if you owned those stocks a month ago. In this case, that’s not something you really want. But even if it were, plans are usually written not to work that way, to protect the company from liability. People would come out of the woodwork with all kinds of retroactive claims.

I, too, am optimistic that they should be able to let you get a contribution in by the end of the year if you decide to do so.

9

Couldn’t HR processing the paperwork ass-backwards constitute a breach of fiduciary duty? I was looking at ERISA and the words I saw included ‘prudence,’ ‘care,’ 'skill, and ‘diligence.’

10

This is speculation, but I think it would have to come down to a lawsuit alleging that they were so careless as to constitute a breach of fiduciary duty. I could see that happening if, for example, the company neglected to file any changes for any employees for six months. But not every paperwork error in a generally well-run department is going to be breach of fiduciary duty. So that’s not to say someone might not conceivably get made whole, but it would be way bigger than a breadbox.