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Right now I think the stock market is way too high and I'm thinking of dropping my 401K contribution to 0%. My employer gives each employee 5% of their income into their 401K account regardless if you put into it or not. So there is no matching, there is no required minimum, I get 5% of my gross salary whether or not I contribute. I'm not sure if this is a good idea or not but I'd really like to have the extra ~$350/month particularly to pay off my student loans. Your thoughts?
When you're young is when you can afford to take risks and chances. Pulling out of the market is a knee-jerk reaction. Nobody can really tell what the market is doing. Let me put it to you this way. I am in my early 30's. I invested a chunk of money into the market back in 2007- right when the market was about to tank. At one point my investments were worth 45% less than they had been at the peak. The trough was in 2009 when the DOW was pushing 6,000. In about a year my values were back right where they had been in 2007 and now they're gaining.
Long story short, there are always going to be rise and fall in the market overall. It looks more like a whipsaw pattern. The key is to look at the big picture long-term. Since the 1890's the stock market has had a median annual gain of 7-8% per year. Keep in mind that is LONG TERM- as in anywhere from 30-40 years. There might be extreme inflation and deflation at any given time- as has happened throughout the last 100+ years. But long term those that tend to invest broadly in the market do well.
The name of the game is time and investing for as long as possible. You're already smarter than about 75% of the 20-somethings I know who have zilch in savings. The younger you are that you start investing the less you actually have to invest in order to make it to retirement.
Don't do it. Every dollar you can put into stocks when you are in your 20's means the difference between a comfortable retirement and one that's merely adequate. Most economists say 2011-13 are going to be bullish years. Even if the markets do go down, when you look at them over a 20-30 year timespan you will not even notice the drop. Maximize the money you invest when you're young, because you will appreciate it that much more when it comes time to retire.
Right now I think the stock market is way too high and I'm thinking of dropping my 401K contribution to 0%. My employer gives each employee 5% of their income into their 401K account regardless if you put into it or not. So there is no matching, there is no required minimum, I get 5% of my gross salary whether or not I contribute. I'm not sure if this is a good idea or not but I'd really like to have the extra ~$350/month particularly to pay off my student loans. Your thoughts?
I agree 100% with what Silverbox and Mustang said. I would add that if I could do it all over again, I wouldn't invest 100% in stocks. I think balanced funds that invest in a mix of stocks and bonds are the best approach (or a mix of stock and bond funds if you don't have a good balanced fund option). The better balanced funds (see list below) tend to match or beat the overall performance of large company stocks over long periods of time, with less volatility, so they're a lot easier to stick with.
Our emotions tend to run in extremes and investing according to your emotions almost always guarantees you'll sabotage yourself and get lousy returns.
Look for a good balacned fund in your 401k and stick with it. People tend to stick with these funds because they are less volatile than pure stock funds. Examples of good balanced funds that tend to be staples in 401K plans:
Vanguard Wellington
Fidelity Balanced
Fidelity Puritan
Vanguard Balanced Index
Dodge and Cox Balanced
T. Rowe Price Capital Appreciation
American Funds AMerican Balanced A (or R4, R5, or R6 share classes)
American Funds Income Fund of America A (or R4, R5, or R6 share classes)
Oakmark Equity and Income
Invesco Van Kampen Equity and Income
If you have a "target date" fund in your plan, you may also want to consider one of those.
Another option may be to have a mix of stock funds that make up 60% to 75% of your portfolio, and then a bond fund or funds to make up the other 25% to 40% and then have it rebalance automatically every quarter. My plan has this feature where you can set it up so that it will rebalance automatically at various time intervials. I suggest you check to see if your plan has a similar option.
I'm 40 and have a low 6 figure 401k. I'd have a lot more money in my plan if I'd known then what I know now.
If you want my .02 worth on which fund(s) to pick in your plan, feel free to send me a private message. I am a mutual fund junkie.
Last edited by mysticaltyger; 03-29-2011 at 05:51 PM..
Right now I think the stock market is way too high and I'm thinking of dropping my 401K contribution to 0%. My employer gives each employee 5% of their income into their 401K account regardless if you put into it or not. So there is no matching, there is no required minimum, I get 5% of my gross salary whether or not I contribute. I'm not sure if this is a good idea or not but I'd really like to have the extra ~$350/month particularly to pay off my student loans. Your thoughts?
It does not matter what the stock market is doing as far as your 401K goes. You are in your 20's. 100% of your contributions should be in Stocks.
Don't do it. If you feel the need to help pay the student loan then I say just throttle back a little maybe $100. That would satisfy your immediate need to pay that loan off without wrecking your retirement plans. If you have to find a second job to replace that $100 then do it. For 20 years I worked 2 jobs and as a result of savings I am over the 300k mark and I got 12 years to go.
Don't do it. If you feel the need to help pay the student loan then I say just throttle back a little maybe $100. That would satisfy your immediate need to pay that loan off without wrecking your retirement plans. If you have to find a second job to replace that $100 then do it. For 20 years I worked 2 jobs and as a result of savings I am over the 300k mark and I got 12 years to go.
Best of luck.
300K in 401k? I think if the market does faily well, you can get up to 750K in 12 years.
It does not matter what the stock market is doing as far as your 401K goes. You are in your 20's. 100% of your contributions should be in Stocks.
In theory, I agree. In practice, most people can't handle the volatility of a 100% stock portfolio. That's where balanced funds come in. Study after study of actual investor returns shows that most people bail when stocks tank. Fewer people bail from balanced funds because they are less volatile, so people tend to get better actual returns from these funds than from 100% stock funds because they are less likely to bail out of them at the wrong time. If you can pick one of the better balanced funds that I listed in my previous post (and I'm sure there are others), you can match or beat the long term returns of the S&P 500 with less volatility. Unfortunately, I learned this lesson the hard way. Being 60% to 75% in stocks is good enough, and you still get the extra benefit of dollar cost averaging when your fund is down, as the balanced funds were in 2008 (although less than the S&P 500).
You are in your young 20s. Save as much as you can without overextending yourself from having some fun (you're young!) and paying your debts off (car, student, credit card, etc) as fast as possible.
If anything, if you do decide to stop contributing, put that money to paying down your debts first. A lot of credit card debts and student loans outpace the performance in the stock market for the average joe.
But don't let that money sit there! Work it!
As far as the advice re: the stocks and your 401(k), my advice is four simple words. Dollar cost averaging, and compounding.
Albert Einstein said compounding is the most powerful force in the universe. The same can be said to the finance world.
Say you can time the market and make killer returns. A person who can do that has to work VERY HARD to do so and even then, practically, cannot do it more than 1/2 the time. I'm assuming you have a job so you cannot do the research necessary to play with the likes of Goldman or JPMorgan.
But assuming 100% accuracy in prediction, besides me advising you to let me pay you my money to manage it for me, you still wouldn't make as much by the time you retire than if you had simply started contributing as much as you can at first. Why? Compounding. The dollar cost average will decrease as the market tanks. You buy shares as they go down knowing that eventually they go back up (talking broad sectors here, not individual stocks). If you have more shares as they start going back up, the more you profit. Yeah your return won't be as high, but you'll have more dough, and that's what really counts.
You could go half with that $350...let $175 go into the 401K and use the other $175 to pay down your loans. Once the loans are paid off then start working on your 401K again.
Me..I don't like debt so I always try to pay down my debt when I have extra money and then refocus into investments when the debt is paid off.
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