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My husband's 401K has taken a huge hit the last couple of months - down 40%. Maybe not very well diversified, has always invested in aggressive growth funds, some very aggressive and other moderate, and until NOW that has worked out well. I'm afraid if he moves what is left to bond funds then he'll miss out when the stocks rebound.
We have three kids in college so he had cut back on the amount he was contributing to his 401k; he used to fund it fully every year. The plan was for him to go back to funding it fully starting January 2009. Now not so sure about that. Should he go ahead and fund it fully but direct future contributions to bond funds until things turn around, and maybe leave what we have already in there alone? Or just keep on doing what he's been doing and know that eventually it will rebound?
My instinct is to contribute the max and keep investing in aggressive growth stocks, maybe put a third into bonds.
That's my husband's. I have a small business so I need to open a SEP. Same with that - I don't know where to put money right now. And then I know we should be funding Roth IRAs too.
15-20 years till retirement.
I'm reading Start Late, Finish Rich and trying to drill it into my kids' heads not to SPEND every cent they have. They're not listening. How much easier would it have been if I had saved 10% of everything I ever made?
You cannot look back. The advice I have to you is pretty similar to what I just gave to a kid switching jobs.
In a way it is just the same sort of "emergency medicine" that field medics are trained in:
#1 STOP THE BLEEDING -- get out of funds that are declining. They are too volatile right now and you're money is draining out. I would also TEMPORARILY shift new money into the fixed income/cash equivalent areas. If you have a nice GNMA fund or Intermeadite Term Federal Bond Fund those are doing better than money markets. If things REALLY go down the drain in the mortgage market (and signs are THAT WON'T BE ALLOWED TO HAPPEN) the money market ought to hold steady.
#2 CLEAR THE AIRWAY -- as long as don't need every cent to pay bills you HAVE TO FUND THE IRA with every thing you can! Things WILL do better down the road. If they money is not put into the IRA/401K on a REGULAR basis you will NOT be able to take advantage of upswing.
#3 TREAT FOR SHOCK -- most "aggresive growth funds" are CRAP. I know that is shocker, put it is true. Instead you want funds that you can actually track performance against a benchmark. This is pretty simple. There are ETFs for dozens of sector funds. Pick a sector that you understand and find a fund that behaves like the ETF (or buy the ETF itself). I have no problem with specific "market capitalization" funds either -- small caps, mid caps are more volatile than large caps (over time) and there are plenty of books that give formulas/ advice as to how to balance among them. In general, though, sectors are 'cleaner' and you get less overlap. Look at what happened with oil sector funds. Huge run up and then rapid fall off. You can rebalance that easily. Much harder to sort the Exxon-Mobiles away fromt he GMs in the S&P...
ETFs and sector funds are not perfect, but they are a great tool for the times we are in. There is unprecedently volatlitliy. The government is likely to increase intervention in some sectors and not in others. Being able to take advantage of that upside while avoiding the downside is possible with sector funds.
Sector funds are NOT "set & forget" instruments. You have to be able to rebalance rapidly, and not get emotional when things shift, but if you do that you can get outpace the broad indexes, this happened before. Coming out of the 80's sectors were HOT, as the whole market grew they sorta got lost to the 'magic' of index funds and the age target funds, but there are many signs that they will again be a useful tool for those who can stay on top of their investments.
I like to use the Morningstar guide at the public library and then get more detail from my online brokerage/ IRA custodian. If you have only crummy fund choices (and more than a few of those look to be the high management fee/ unimpressive performance type funds) you are limited to either just sticking with the "fixed" portfolio or trying to sniff out the best of what is offered. If the market improves the mid cap growth MIGHT be a decent choice, but again I much prefer sectors in this environment. When you group companies just by capitalization you often get exposure to bad performing sectors and you have to put a lot of faith in the fund manager. Over the really long haul all funds trend toward the broad indexes. Thus it is MUCH harder to justify that your plan seem NOT to have either the very narrow ETFs/ sector funds NOR the really big low fee indexes...
In general, when the funds choices are poor it is up to you to tell that to your HR people and HOPE that they get better plans. If enough employees make noise the bosses MIGHT work to get a new plan administrator, afterall these things are SUPPOSED to be benefits to the employees and encourage HAPPY Employees!
If they don't offer enough good choices you have to engage is some effort to "overweight" funds that you have in self directed IRAs against the stuff in the employer 401K. I have heard of plans so limited that the tax advantage is outweighed by simply picking your own taxable plan, but that seems extreme...
I like to use the Morningstar guide at the public library and then get more detail from my online brokerage/ IRA custodian. If you have only crummy fund choices (and more than a few of those look to be the high management fee/ unimpressive performance type funds) you are limited to either just sticking with the "fixed" portfolio or trying to sniff out the best of what is offered. If the market improves the mid cap growth MIGHT be a decent choice, but again I much prefer sectors in this environment. When you group companies just by capitalization you often get exposure to bad performing sectors and you have to put a lot of faith in the fund manager. Over the really long haul all funds trend toward the broad indexes. Thus it is MUCH harder to justify that your plan seem NOT to have either the very narrow ETFs/ sector funds NOR the really big low fee indexes...
In general, when the funds choices are poor it is up to you to tell that to your HR people and HOPE that they get better plans. If enough employees make noise the bosses MIGHT work to get a new plan administrator, afterall these things are SUPPOSED to be benefits to the employees and encourage HAPPY Employees!
If they don't offer enough good choices you have to engage is some effort to "overweight" funds that you have in self directed IRAs against the stuff in the employer 401K. I have heard of plans so limited that the tax advantage is outweighed by simply picking your own taxable plan, but that seems extreme...
It IS hard ot read and what i copied was nice and organized but when I pasted it, it all ran together. tried to figure out how to fix it, but couldn't!
Thanks for the advice. His company 401K was with Principal for several years and we were really happy with Principal. They switched to Great West a year and a half ago and have never done as well as we did with Principal, even before the disaster of the lat couple of months.
#1 STOP THE BLEEDING -- get out of funds that are declining. They are too volatile right now and you're money is draining out. I would also TEMPORARILY shift new money into the fixed income/cash equivalent areas. If you have a nice GNMA fund or Intermeadite Term Federal Bond Fund those are doing better than money markets. If things REALLY go down the drain in the mortgage market (and signs are THAT WON'T BE ALLOWED TO HAPPEN) the money market ought to hold steady.
Why cash out and try to time the market bottom? You have to be in it to make money in the market. Cashing out now means you are selling low and you plan to buy again when it's high. Is that how you make money?
If the "aggressive growth fund" is a poor performer it will continue to underperform. Get out of it. It is silly to watch it continue to decline. Stable value will stop the bleeding.
If the "aggressive growth fund" is a poor performer it will continue to underperform.
Well, probably as long as the market continues down, yes. But aggressive growth could very well lead the way up when it turns around too. (That doesn't mean I necessarily disagree with you about most aggressive growth funds being "crap.")
The problem with moving current investments into stable value (et al) NOW, is that you'll be locking in your already-large loss to some degree. When the market turns around--and it will--you'll miss out on some or all of the recovery. The time to get conservative was at the first sign of trouble, not now after most of the damage has likely already been done.
I see nothing wrong with investing NEW contributions into stable value. I also see nothing wrong with continuing to invest in stock funds (if you're young) and buying shares at lower prices if the market continues drifting down for a while.
RIght, completely agree. The advice is for funds that are CRAP -- high management fees, don't perform in line with the "category benchmarks", et cetera.
When you have a fund like that in your 401K you are kidding yourself if you think "it'll turn around".
It sucks to "lock in losses" but it sucks worse to see you position continue to decline.
It is not a "market timing" philosophy so much as QUALITY argument. Quality funds out perform the peers in good times and bad, have low fees and management that behaves in a way that you can understand / respect.
In regards to "market timing" I do think that there is good evidence that extraordinarily BAD market conditions are when it does make sense to GET THE H377 OUT! Things right now are VERY different than merely "selling into a declining market" or other general no-no's -- huge market disruption, coupled with new administration and unprecedented level of government intervention et cetera.
Of course the tough thing is "when is the tide safe for swimmers"? Or "how do I time my way back in"? Well, for EACH PERSON they have to decide what they are willing to tolerate for risk -- depends on age and other factors like NEED for retirement income (vs pension, ability to delay retirement). The info can come from the "market sentiment" of professionals (even though they are often wrong their opinion is still useful, the various signals that the Fed gives and the reports they and other government agencies report, or even a rationally derived checklist. There are plenty of these floating around.
Finally, yes, it makes sense to "dollar cost average" back IN to quality funds (if there are any in that list...) but again there is BIG difference between getting back into well managed funds in a 'normal' market and literally saving you skin from the double of BAD funds and a freakishly ferocious bear market...
I'd stay the same or increase my contribution. You are buying at near a low point and you dont need it for 20 years. Stay the course.
I've been picking up a few beaten up stocks in the last month and have made15-20% on many of them. Granted Im looking at a 3 year hold.
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