I‘m all too often amazed when a random conversation strikes up with an acquaintance and the topic of investing and the economy comes up. So many times I run into people that are completely frustrated with the markets that they’ve given up saving all together.
Yes. They are saving nothing.
I’m left scratching my head wondering what their “retirement plan” is.
If you are fed up with the stock market and your 401k, I get it. The market has not been very friendly lately. But that doesn’t mean you should pull all your money from your 401k all together. If you’re considering giving up on your 401k, don’t. At least read these tips on what not to do, first.
1. Do not stop contributing to your 401k no matter what.
Just because the markets are down does not mean you should not contribute. In fact if there was a time ever to contribute, this would be the time. The simplest reasons is that right now despite the market’s turmoils, currently the market is at a discount, and what that means is that there are a lot of great companies that exist out there, that are currently “on sale”.
This is a time to buy stocks, at a cheap price, in hopes to benefit from the appreciation in later years. This strategy can also be called dollar cost averaging, which means as long as you are contributing on a consistent or periodic basis, you’ll take advantage of buying shares at a lower price in down markets, and compare that to buying shares at a higher price in up markets, which should then all balance out for a dollar cost average.
If the market has you completely terrified, then consider changing all future contributions to short term or intermediate bonds. At least that way you’re money is making a little interest while the market tries to figure itself out. And if you’ve cut back your savings, you’re in luck. They just announced that the 2012 401k contribution limits have increased to $17,000 a year. That way if you skimmed back the past few years, you have a chance to get caught up.
2. Do not put all of your 401k into the money market.
While I understand the disbelief in the markets right now to where you want to shift all of your money into the money market, by doing this would be a great mistake. If you believe that making money in the market is to buy low and sell high, then by shifting your money into the money market from your other investments, it would be the exact opposite; buying high and selling low. If you’ve seen your 401k lose a lot in the last several months, the only way to get that back is by staying exactly where you’re at.
Now, I understand for those nearing retirement, that this can be a compromising situation, but if you visit the rule of 72, meaning that you take 72 divided by the interest rate on your investments, and that will tell you how long it will take to double your money. That also, too, will give you an indicator how long it will take you to recoup the losses that you have incurred.
By shifting to the money market, chances are, you are making somewhere in the 1% interest rate, which means it would take you almost 72 years just to double your money, and to recoup your other money that you’ve lost, would be that much longer.
3. Do Not Check Your Account Daily
I always advise to stay in touch with your investments. I have many clients that don’t even open their quarterly statements when they get them in the mail. On the opposite side of the spectrum are those that check their accounts daily – and sometimes more than that.
Checking your 401k balance every single day will give you no additional benefit, just additional worry. If you have many years ahead of you before retirement is a reality, then checking it once a quarter is sufficient.
From my experience, those that check it often are more likely to “day trade” their 401k which is never a good thing. Remember the long term plan and stick to it.
4. Do not borrow against your 401k.
This can be said in an up market or down market, but I had to throw it in there. Borrowing against your 401k is never advisable, especially in a down market. Look to start an emergency fund of some kind so that you can have that to fall back on in case of an emergency. If you don’t have an emergency fund, start one now. There’s no sense in contributing to your 401k if you have to pull it out just pay the bills.
Have you given up on your 401k?