401k is losing money – crash and burn
I don’t check my 401k balance often at all. I prefer not to stress about it and just let it grow. I’m investing for for the long haul and know that overtime my money will grow at a 10-15% increase. I do check it though. Mostly to see if I need to adjust my funds distribution a little based on individual mutual fund performance. I logged in last week to see how things were going, especially with the stock market tanking like it has recently. While I wasn’t shocked, I was very surprised…
My 401k is losing money and dropped 20,000 over the past 2 months. Yes, that’s 20 with 3 zeros! I’ve been contributing to a 401k program since the very first day I started working after graduating from college. The percentage varied from 1% – 10%, but I’ve always contributed. Until I checked last week, I had never lost money…never. Seems there is a first time for everything, and what seems to be a trend with me is that when I do something, I do it big time. That was a big time loss.
What to do when your 401k is losing money
I wrote a few months back about what to do if you started seeing your 401k losing money. My advice then was to hang in there and keep investing. The market at the time was beginning a downward trend, but only gradually. Since then the overall decline has become far more significant. Now what do we do.
I’m sure I’ll get a great deal of replies from people that disagree, but I’ll stick with my initial advice: Stay the course. The advantages of a 401k program are far more than just investment growth. There are tax benefits and in many cases employer matching. The money you place into your 401k is removed when your taxable wages are calculated. That means that right now, you don’t pay any tax on your 401k contribution and your taxable wage amount is reduced by the amount contributed into the 401k plan. Not to mention, you don’t pay any taxes on the interest or growth in the account, for now. I say for now, as once you do begin pulling from your 401k later in life, you’ll be required to pay taxes. For this reason alone, continuing to contribute is a good idea.
Dollar Cost Averaging
Regarding stock growth, the important thing to remember right now is the concept of dollar cost averaging. Your 401k is losing money now, but will it continue? With the stock market, their are no guarantees. If you are young and have your 401k money invested in high growth stocks than your risk for losses are high…but your risk for big gains is high as well.
Dollar cost averaging basically deals with the fact that in a 401k program, you are most likely contributing a basically fixed amount into your 401k program. That same amount gets invested each and every paycheck. Sometimes you’re buying stocks low, other times you’re buying high. Right now, we’re all buying low…real low.
Sound familiar? It should, it’s the old stock market golden rule of “buy low, sell high”. Right now, you’re buying more shares for the same money..lots more. When the market does turn and contrary to all of the stock market chicken little’s running around screaming the sky is falling, it will return all of that stock purchased at a low cost will yield high returns.
The math is a bit complicated, but dollar cost averaging basically states that market fluctuations yield higher returns in the long run. Does this mean we should all run out and buy tons of stock and maybe even bump up our contributions? Maybe, but I’m not a fan of trying to “time the market” as this strategy is called. I personally prefer to invest a fixed amount over time and let it average a high return for me. This is the essence of dollar cost averaging.
The tortoise and the hare
Remember the story of the tortoise and the hare? Slow and steady wins the race right? There are of course “smart hares” that by pure luck or my pure skill win big. There are non so smart hare’s that lose big too. I prefer to be the tortoise. I just keep investing at a steady pace and watch my investments slowly and steadily grow. I’m not an investment guru, nor do I even pretend to be one. What I do know is that over the 15 years I’ve been investing, my 401k balance has slowly grown. Sure it’s losing now, but that’s just part of the ebb and flow of the market.
My advice? Hang in there and don’t watch your balance daily, weekly, or monthly. Just let it slowly grow over time.
The only caveat to this advice is if you are older and closer to retirement. If that’s the case, I’d highly recommend you engage a professional to get some advice. Being closer to retirement, you have less time to recover your current loses and it just might be a good time to move your allocations into more stable funds.
What are you guys doing with you retirement money? Are you staying the course, making changes, stopping contributions? Share your perspective and thoughts. Add a comment!
Photo by: CharlesLam