What to do with my small 403(b)

September 15, 2008 10:22 AM

Should I transfer my retirement assets (403b) from a mid-level risk money market fund ?

The fund (through principal financial group) has lost nearly 10% since last june. I have the option of moving it into a fixed 3.95% income account...... Given the situation, do I eat the loss and move it, or hang in hoping that the market will recover?

posted by HuronBob to work & money (12 comments total)

When do you need the money?

If your retirement is years away, then moving it to a fixed income account is probably not a good idea. That would be following a strategy of "buy high sell low," which is not ideal.
posted by justkevin at 10:37 AM on September 15, 2008

Are you sure that's a money market fund? A money market fund should not lose 10% - that would be considered "breaking the buck" and would be considered a rather spectacular fund failure.
posted by milkrate at 10:42 AM on September 15, 2008

justkevin... I do understand that philosophy, but, with retirement at the most 10 years away... will this mess turn around by then?

I've got this worst case scenario in my head of my meager funds being chopped away at to the point that they won't recover.
posted by HuronBob at 10:44 AM on September 15, 2008

milkrate... "money market" may be my own ignorant generic term.. I have the funds in one of the investment options through principal financial group.
posted by HuronBob at 10:50 AM on September 15, 2008

I can't make any promises regarding the stock market, but there are very few (if any) 10 year periods where the stock market did not outperform inflation. There aren't even very many 5-year periods.

Let's say you do move your money out. Will you have enough to retire in 10 years at 3.95% (don't forget to account for inflation)? Would you put your money back in the market once things are "safe" and the S&P500 is up above 1400 again?
posted by justkevin at 10:55 AM on September 15, 2008

The fund (through principal financial group) has lost nearly 10% since last june

The overall US stock market is down around 18% since then, so congratulations, you beat the market! Seriously though, the amount that a certain stock market fund has gone up or down in the last year isn't a very good indicator of how well it will do over the next few years. The best option for most novice investors is to find a low cost index fund that tracks the overall stock market and just count on the stock market to be up in the long run.

Given the situation, do I eat the loss and move it, or hang in hoping that the market will recover

You already lost the money, and moving to a different investment does not somehow "lock in" your loss. The question you should ask "Do I want to continue to invest long term (and possibly suffer short term losses), or do I want to only invest in the short term?" My guess is that since you are going to retire in 10 years, you'll want a mix of both.

The conventional wisdom is that you'll want about a 50-50 mix of stocks and bonds in your situation, and that's what you'd get if you invested in a target retirement fund. It's really up to you personally though. The point is to set aside some amount of your savings in a relatively safe investment (such as bonds) and still leave some invested in higher risk stocks to continue to see gains that will help later in retirement.
posted by burnmp3s at 11:24 AM on September 15, 2008

Justkevin...thanks for the continued responses... sadly, no, retirement will be tough in 10 years at ANY percentage...I'm trying to minimize the loss at this point....

I wouldn't see putting it back in the market until things are done falling apart...and I'm concerned that will be a while...

When I hear folks describe the situation as a "once in a century" event... I get more than a bit worried.
posted by HuronBob at 11:25 AM on September 15, 2008

I wouldn't see putting it back in the market until things are done falling apart...and I'm concerned that will be a while...

What you are trying to do is spot the "bottom" of the stock market, the point at which it is at the lowest and it's the best time to buy. The truth is that even professionals have an extremely hard time predicting something like that. There isn't a way to invest in the stock market where you always make money and never lose it, you have to be prepared to suffer some short term losses on your way to long term gains. The strategy of taking your money out of the market during bad economic times and putting it back in at the right time does not work, otherwise the people who are running your fund would be doing it.

When I hear folks describe the situation as a "once in a century" event... I get more than a bit worried.

There are always doomsday people who will tell you that the next 10 years will be the worst 10 years in the history of the US stock market. They may be right, but it's more likely that they're wrong. The only thing that we know for sure is that in the long term the stock market tends to go up, and it tends to outperform other kinds of investments.
posted by burnmp3s at 12:48 PM on September 15, 2008

The scary news, such as Greenspan's "once in a century" comment, and this weekends bank collapses, has already been priced into the market. If you have reason to think that even more bad news is coming and that prices will plunge further, you could get out and hoping to get back in at the bottom (aka "timing the market"). But the bottom of the market won't be announced on CNN. In fact, it will probably be the time when pessimism about the economy is at its worst.
posted by justkevin at 12:55 PM on September 15, 2008

Thanks everyone... some reassurance was useful..... I'll hang in, we'll see what happens...
posted by HuronBob at 4:41 PM on September 15, 2008

What you are trying to do is spot the "bottom" of the stock market, the point at which it is at the lowest and it's the best time to buy. The truth is that even professionals have an extremely hard time predicting something like that. There isn't a way to invest in the stock market where you always make money and never lose it, you have to be prepared to suffer some short term losses on your way to long term gains. The strategy of taking your money out of the market during bad economic times and putting it back in at the right time does not work, otherwise the people who are running your fund would be doing it.

That's excellent advice. With the caveat that the fund managers for the funds you are invested in may have restrictions as to who they can invest in. So they may want to invest the fund's funds in better performing stocks, but can't because of the charter of the fund.

In my experience, and cribbing from Jim Cramer, is that the bottom of the market *is* impossible to predict, but that it isn't impossible to recognize. It depends on your own level of anxiety, of course, but when it seems like the world is ending and you are going to lose everything and you are ready to jump out the window, start looking around at the fundamentals of certain stocks. Good companies will start jumping out at you as being unbelievably undervalued.

Like right now, as a blind, completely made up example, the bank stocks are tanking. At the end of the week, it's probably going to be even uglier. Start looking at the banks that you haven't heard anything about. MadeUpBank in Toledo, for example. Their stock is down 50%. You read their sheets and see that they have NO exposure to the crap going on- they took their losses and got out six months ago. They have people lining up at the doors to borrow money from them and can't get enough capital to feed the demand. What's that say? They can pick and choose their customers, they can set their rates at whatever they want, they are selling CDs at 1 point above everyone else, and they are insulated from all the bad stuff that's going to continue to happen. So you buy a CD from them to give them capital and you buy a bunch of stock.

Now, in six months, the mainstream financial media people glom onto their story. "Look at MadeUpBank! They have doubled their stock price and sold a record number of CDs and mortgages! Business is booming! Now, the lemmings start buying the stock and it goes up another 15%. Here is where you sell. Because now the bank is fairly, or even over valued.

Comgratulations- you bought an undervalued commodity and were holding it when it came into demand. No point holding it any longer, because now the bank needs to perform "up to" their stock price. They will need to start making riskier investments to keep up the momentum- which they can't do forever. Their growth will flatten. So you sell into the demand. Those lemmings who bought it at the top are going to start selling, or at least demand will flatten, because the bank is no longer doubling in value.

Take you profit and find another company in an undervalued, but promising, situation.

Lesson: don't sell with the lemmings, sell to the lemmings.
posted by gjc at 7:18 AM on September 16, 2008

The scary news, such as Greenspan's "once in a century" comment, and this weekends bank collapses, has already been priced into the market.

You'd think so, but then again all the major players have known for weeks that Lehman was on its way out, and it STILL caused a shitstorm yesterday. "Priced into the market" is no guard against irrational fear pushing things even lower. I don't think we've bottomed out yet, and the next bankruptcy/fire sale will cause another drop, even if it's a planned event.

You may want to take a hard look at how to reallocate your investments given the current market, but pulling it out completely is probably not a good idea. Talk with an advisor who knows what you're invested in; if the two of you don't think the market has bottomed out yet, you may want to move to something safer, but be ready to jump back in once the market bottoms out - that's where all your profits will come from.

In general though, if you don't have a keen eye for market trends and don't trust yourself (or your advisor) to know when to start buying again, just leave it alone. As others have mentioned, only being down 10% is doing pretty decent given the last year.
posted by chundo at 9:17 AM on September 16, 2008