How do I stop the bleeding?
September 16, 2008 10:03 PM   Subscribe

I know you are not my broker. Despite my personal contributions and my employer match, my 401K has 7% less money in it now than it had a year ago, which is, in turn, is 6% less than it had at this time two years ago. I understand that I'm supposed to be in this for the "long haul" but at this rate I'm losing money faster than I can contribute it. How do I fix this?

I know you are not my broker. I know getting investment advice from a bunch of strangers if fundamentally dumb ... however, your opinion would be helpful.

We don't have much money. I contribute as much as I can and take advantage of the maximum company match, but over the past two years my fairly conservative investments have been losing money hand over fist, and it seems to me that no matter what I do my 401K is going to continue to lose money at a faster rate than I can contribute to it.

I know someone is going to say "educate yourself" but the bottom line is I've been trying to educate myself and use the information my plan makes available, but I a) don't have a lot of study time to devote to this (I work two jobs and parent a toddler) and b) I just don't have the head for it. I just need someone to point at a fund and say "do this" but I can't afford to pay a financial adviser. (At one point I shopped around for one, but at the income level we're at it seemed ridiculous to pay that amount of money to someone when I could be, you know, saving it instead.)

My 401K is with Fidelity. Although I know this probably isn't true, it feels like the only time I haven't seen negative numbers in a three month stretch is when I put the entire thing in the bond index, but at that point I'm only earning less than 2% -- I could do better with a CD (although obviously without the tax help). I'm currently in Royce, which has lost about 8.5% over the past 30 days.

Should I just dump everything in bonds until the crisis is over? Leave everything alone and hope that when the market turns around I'll have enough money left for it to accrue back up within a reasonable amount of time?

I'm about 25 years from retirement. At this point, I don't even have an amount of money equal to a single year's salary left in my 401K, despite having contributed to it over the past ten years. What's my best course of action to preserve what I have left but get at least a better rate of return than I would on a CD?
posted by anastasiav to Work & Money (17 answers total) 4 users marked this as a favorite
Leave it alone. Don't worry. It'll be fine, eventually. If you need to do something, figure out how much you've saved on taxes.
posted by ba at 10:21 PM on September 16, 2008

Stay invested in equities, diversify among asset classes, and don't stress too much. 25 years is a long time. If you want a better return than a CD, you have to accept more risk than a CD.
posted by blue mustard at 10:44 PM on September 16, 2008

Stop doing what you've been doing. Stop trying to time the market (badly).

Dollar Cost Averaging is your friend. Diversify among asset classes and maintain your distribution. Keep investing at a steady rate. Now is your chance to buy low.
posted by Good Brain at 10:55 PM on September 16, 2008 [1 favorite]

You have not lost any money, actually. You only lose money if you sell what you currently own and move the investment funds someplace else. The idea, naturally, is to wait it out and sell the investments when it's worth more than what you paid for it. You don't need the money now -- it's for retirement, which is a long long way off, and when that time comes, I promise you that the Dow and the S&P 500 will be worth significantly more than they are now, barring catastrophe, but if you thought catastrophe were coming, then you should've bought canned goods and bullets. Eventually, the market will go up. Eventually, your investment will grow. Keep contributing and keep hanging in there. The idea isn't what happens week to week or even year to year -- the idea here is what happens decade to decade. Stock market investing for you and me is about the long haul, nothing more. Ignore daily or yearly fluctuations, and just keep contributing. Selling and buying and moving and consulting and so on and so forth will only kill you with fees and increase the potential for bad decisions. Keep your investments diverse, keep them in index funds, and keep putting money in.
posted by incessant at 11:10 PM on September 16, 2008 [2 favorites]

To elaborate on cost averaging: imagine there's a magical way to automatically buy more shares of a stock (or other security) when it is cheap and fewer when it is expensive. Well, if you invest an equal dollar amount periodically -- e.g., every paycheck -- that's exactly what happens. Market plunges 50%? Good for you, you are now buying twice as many shares of the market for the same periodic contribution. Let's say you invest for a year when the Dow is 10,000. It then tanks to 5,000. You invest an equal amount during that year. At the end of the second year, not just half but two thirds your shares would be at the 5,000 price. The third year it goes back up to 10,000. You have doubled your money on the two thirds of the shares you bought at 5,000 and broken even on the shares you bought at 10,000. So you've put a total of say $24,000 in the market ($1000 a month) during those two years. You have doubled your money on the second $12,000 and broken even on the first chunk. You now have $36,000, a 50% return, and the Dow isn't even above where it was when you started investing! Of course, if it then doubles again the next year, you are buying half as much -- good thing, too, because the market is almost certainly overpriced in the short term.

Now in reality, if the market plunged 50% all at once, you would probably have other problems, like where you're going to get more ammo, but the same applies to a lesser extent when the market fluctuates 5% or 10%. You make money even if the market's not really going anywhere, just from normal fluctuations, and when you get bigger fluctuations, which is what you're getting now, you make even more.

Your time horizon is nice and long... stay diversified, keep your administrative costs low, and invest as much as you can. You'll be fine, or as fine as anyone ever is. There are of course never any guarantees.
posted by kindall at 11:44 PM on September 16, 2008 [4 favorites]

If your investments are in mutual funds, appropriately diversified, then the wait it out approach is the best. The idea behind mutual funds is that you are paying someone else to choose when to buy and sell - someone who knows how.

Nearly everyone's account is down now. That is the way it works.
posted by yclipse at 3:52 AM on September 17, 2008

I think George Soro's new book is highly relevant, here. At the end, he provides a journal describing his new investment strategy. At the end of the journal (p 140), he basically says "Well, I'm down on my investment, but it's too important to get this book published, so I'm going to stop here. Hope you get the idea. At any rate, we're moving into an era in which wealth protection is going to be very difficult."

There is probably a shift coming in the financial world which is going to make the principle of dollar-cost averaging seem quaintly self-destructive. There's no fundamental reason to expect a market to keep going up, it's the consensus view only because markets have been going up for as long as most people can remember. And Soros gives a pretty convincing explanation of the forces which have driven this decades-long rise, and the reasons why those forces are probably now tapped out.
posted by Coventry at 4:03 AM on September 17, 2008 [3 favorites]

So Coventry, what's your recommendation for the OP, and the rest of us with 401Ks? (I haven't read Soros' book.)
posted by blue mustard at 4:07 AM on September 17, 2008

If you like listening to podcasts, I find American Public Radio's weekly personal finance, Marketplace Money, tends to be fairly good and educational. Put it on your favorite MP3 player or to CDs, and listen to it while you do other things.

Given your 25 year time frame, as everyone else has noted, don't panic; this too shall pass.
posted by chengjih at 4:20 AM on September 17, 2008

Thank you for all the comments so far. A couple of follow ups:

Stop trying to time the market (badly).
I haven't been trying to "time the market". The last time I changed investments was 26 months ago when some new funds became available in my 401K plan. Prior to that, I did some redistribution in 2000 and 2001. September happens to be the anniversary date of my hire, so I try to look at things every September, just to evaluate.

You have not lost any money, actually.
I guess this is the part I don't understand. In the past year I've contributed $X to my 401K, and now (or even as of a week ago, before the "big" crash) the total value of my investment has declined by more than $X. So it really feels like I'm just throwing money into a big sinking hole. If I had the option to buy CDs with the same money I'd still have the money plus a little. Yes, I have more shares than this time last year, but those shares might as well be Beanie Babies for all the value they're providing at this time.

There's no fundamental reason to expect a market to keep going up, it's the consensus view only because markets have been going up for as long as most people can remember.
This, I guess, is my point. "Past performance is no guarantee of future results." Coventry, given that I probably don't have time to read an entire book in the next four months does Mr. Soros (or do you) have a recomendation as to the best course for wealth protection over the next 1 - 5 years?
posted by anastasiav at 5:24 AM on September 17, 2008

I'd leave it. I don't know what the market will do next, but buying high and selling low will pretty much always lose.
posted by meta_eli at 5:27 AM on September 17, 2008 [1 favorite]

I'd agree with the above posters. Basically, I think the reason why the above poster is saying you haven't lost anything, is because you really only lose money if you're going to take money out for retirement.

I don't know how completely accurate that is, since it's not helpful to be losing money in terms of interest in the account and stuff, but I think the essence of the statement is true.

You really will only need to seriously start worrying once you get closer to retirement and then you will want to move some of your money into a guaranteed rate fund.

Another thing I would say is I'm not sure what kind of funds you have invested in. My employer has many funds in my plan that have high fees. Most of them are above 1%. I have a good chunk of my money in an index fund, where the fees are lower.

I would suggest you just go through your account and check what the fees are for each fund you have your money in and consider an index fund if one is offered.
posted by hazyspring at 5:40 AM on September 17, 2008

You have not lost any money, actually.
I guess this is the part I don't understand. In the past year I've contributed $X to my 401K, and now (or even as of a week ago, before the "big" crash) the total value of my investment has declined by more than $X.
Maybe this will help: The current value (if you sold now) is down, but you are now purchasing many more shares than you would have if the market had remained high. so currently value is low, but potential for higher value in 25 years is going up at a higher rate than before.
posted by jrishel at 6:27 AM on September 17, 2008 [2 favorites]

The idea (to which I am clinging as I am in the same boat) is that the cash value of your account is down, but the amount of shares purchased is up. Down the road you will have more when (some of) the shares recover and go up. If you take the money out you're "selling low." So you leave it, and down the road the money you're putting in now will show a good return. Or so I hope.
posted by ClaudiaCenter at 8:52 AM on September 17, 2008

anastasiav: "So it really feels like I'm just throwing money into a big sinking hole."

The following is my entirely non-expert understanding, and any experts should be paid attention to more than me.

Let's say you are constantly putting in $40 per paycheck into your 401(k). Your 401(k) is buying GoofCo stock, but because the economy is doing good, GoofCo stock has a high price: it costs $80 per share. So you are buying only half a share with each paycheck. But let's say the economy crashes and crashes really really badly. All of a sudden, GoofCo goes from $80 a share to $0.50 a share. Your $40 is still going in and it's now buying you 80 shares per paycheck. Then, in maybe five, six, or seven years, the economy starts to get better. During that time, you were picking up 80 shares per paycheck, so let's say you had maybe 96 paychecks (two checks a month for four years) and picked up 7,680 shares. Soon, the economy recovers and the stock price is up to $100 a share. Those 7,680 shares you bought when times were bad — which you paid a total of $3,840 for, because of that worldwide depression — are now worth $768,000.

Now, most 401(k) funds are mutual funds, meaning they're one fund that invests in a whole bunch of other funds (and that's good, because then you don't have to worry about one company going bankrupt and stealing all your stock, in which case you would lose all your money), but the same idea applies. And the numbers I picked were really dramatic to illustrate the point — but the same idea applies. If the economy crashes, your money total may go down, but the number
of shares stays intact — and while the economy's bad, you're picking up lots more shares than you could afford when the economy's good. When the economy recovers, those added shares make your 401(k) account look really, really nice. :)

Now, the question is: can you wait for the economy to recover? If you were someone who was near retirement and couldn't give the economy time to recover — in your late fifties, or your sixties or seventies — hell, yeah, I'd either shove everything into bonds or withdraw it as soon as I could. Because who knows how long the economy'll suck? My dad's 70. I don't believe he has a 401(k) any longer, but if he still did, I'd tell him to drain that puppy dry right now.

But even the Great Depression (which wasn't just the U.S., it hit everywhere) only lasted from 1929 to 1936 — about seven years. Even if we crash, I don't think it's going to be an utterly fatal massive crash that will destroy the United States economic system for decades.

Not to mention that an early withdrawal from your 401(k) is excruciatingly expensive. You are taxed on that money as income (because you weren't taxed on it when it was going in), and you are also taxed an additional 10% penalty. That means that you can take whatever you withdraw, take whatever your tax bracket is off the top, and take 10% of the amount as well. That's a very expensive "fee" to pay to yank that money.
posted by WCityMike at 9:18 AM on September 17, 2008

There is a LOT of talk here about Dollar Cost Averaging -- that's where everyone's saying "Well, the market is down, so stocks are cheaper, so you're buying more stocks with the same amount of money..."

IGNORE THIS. There's plenty of time to learn about it, but right now, in your current moment of panic...

ONLY THINK ABOUT ONE THING -- you're putting money into your retirement account. Its 'paper' value is currently down, but when you need it, in 25 or 30 years, it'll be WAYWAYWAY up. Beanie Babies might be up or down over the short term, but they'll be WAYWAYWAY down over the long term. That's why you invest in stocks, not in Beanie Babies. As I said in my earlier post, this is a long term game, not a short term one. It is a sinking hole this week. It won't be a sinking hole for thirty years.

You don't need the money now, so its current worth is inconsequential, as long as you're diversified in a variety of funds.

I'm not suggesting you remain an uninformed investor, but right now, all you need to worry about is putting money into your retirement account every month.
posted by incessant at 10:13 AM on September 17, 2008

given that I probably don't have time to read an entire book in the next four months does Mr. Soros (or do you) have a recomendation as to the best course for wealth protection over the next 1 - 5 years?

The point of that anecdote is that wealth protection is going to be very hard. Personally, I have had my money in the Prudent Bear mutual fund since the spring of last year. It hasn't done very well. (Not as well as if I'd followed my gut and loaded up on SRS or something. :) It hasn't actually kept up with inflation, I think. But the manager of the Prudent Bear has roughly the same view of the financial world as I do, and it has made some money, in nominal terms.

Soros is worth a read, and short. I read it on the plane from San Francisco to D.C., and finished it with time to spare. His specific recommendations were short US stocks, long China and India stocks, but that was months ago, and things change fast. (I haven't been paying attention, and have no idea how that plan might have panned out for him.)
posted by Coventry at 10:21 AM on September 17, 2008

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