Why I Continue to Believe in 401(k)s
Yesterday, we watched as the Dow reached the lowest level it has seen in more than six years. Today, we watched it decline further on rumors of bank nationalization. Given that, you are probably wondering why we continue to promote a long-term investment strategy for your retirement account. It’s a good question and one that I’d like to address with the following thoughts:
- Investing for retirement is a long-term process. Even if you are close to retirement, you still need an investment plan to carry you through your post-employment years (a period of time that will likely be at least 10-20 years).
- You can take advantage of dollar cost averaging. This will enable you to buy more shares at a market trough and fewer shares near a market peak.
- Our economy is resilient. Time and time again, our economy has innovated because of and rebounded from downturns caused by wars, recessions, oil embargos and more.
With all this in mind,
- I’m continuing to follow my investment plan. It’s a good plan. I’m not going to let short-term fluctuations affect my long-term decisions. I also wanted to congratulate our clients on continuing to follow their investment strategies. Recently, in our client newsletter, we surveyed our clients and found that more than 90% of them either maintained or increased their contributions during 2008.
- I’d like to ask you to take a weeklong moratorium from the noise surrounding the market. It’s difficult to think long-term when you are constantly being bombarded by the media with stories that are about today, not tomorrow.
If you decide to take a break, email me and let me know. And as always, please let an advisor or me know if there is anything that we can do.
Scott H
February 23rd, 2009 at 10:03 pm
Scott,
Over 18 months, I have watched my retierment balance deminish from $140000 down to $75000 as of today.
I too believe in dollar cost averaging and that is why I haven’t bailed.
I am currently contributing around $350-$400 with no match from my employer.
Assuming we are now at the bottom(which may not be);What rate of return would we have to perform at to recover everything over the next two years?
March 2nd, 2009 at 11:22 pm
That’s it. I can’t take it any more. This is no reflection on smart 401k I just started using them, about 6 months. However, I’ve seen almost 200k turn into 98. Every talking head in the media is flat out saying “pull your money out now!. It will be better to miss out on some of the up side than to loose it all now”.
I’m placing the order to move my holdings into the money market account in order to protect it without tax problems. I believe it will execute sometime before the close tomorrow.
March 3rd, 2009 at 5:53 pm
Larry,
Apologies for the delay. Assuming the following:
- an equal return each month
- an investment of $350/month
- you use the earnings on your new investments, but not the investment itself, to help you make up the losses
You’d need a return of
- approximately 32% annually to be made whole in two years
- around 20% annually to be made whole in three years
- slightly less than 15% annually to be made whole in four years
- and less than 12% annually to made whole in five years
If you invest $400/month instead of $350, the required returns would be a bit lower. Hope this helps and let me know if you have any other questions.
Scott H