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Old 12-29-2008, 12:49 PM
 
1,282 posts, read 2,305,245 times
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Hello, I have a good question. Feel free to recommend some good book on 401k if needed, I think I am confused.

My co-worker believes people should stop investing in their 401k because the everyone have high (eg, -50 to -30 %) negative (red showing) returns on their 401k. He thinks "why put it in, if its losing more money".

I disagree with him, because 401k is a retirement fund and free money up to 5% of the pay check. Also, I disagree with him because the money I am putting in now is used to buy low value stocks the funds are buying. Yes, i have high losses for the past 3 months, but is it ture that people should stop contributing to 401k. If so, please explain.

Please comment.

Thank you.
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Old 12-29-2008, 01:00 PM
 
Location: Beautiful Lakes & Mountains of East TN
3,454 posts, read 6,712,311 times
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If the employer is matching, I'd have enough taken out to take full advantage of the matching funds, since there's a return on your investment guaranteed right there.

I'd also invest in very conservative funds, not straight 100% stocks like I normally would have. Maybe 50/50 stocks and money market.

I'm a chicken right now but still believe in the power of dollar cost averaging and stocks are indeed cheap as can be right now, but you don't want to lose too much. I'm no pro; that's just what I'd be willing to do.

(I can't subscribe to my own theory, though, since my spouse has been laid off I've had to suspend contributions completely since we have had such a cutback in income.)
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Old 12-29-2008, 01:09 PM
 
28,449 posts, read 73,391,949 times
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Darrell:

You pretty close to EXACTLY correct. The "free money" part ALONE is worth contributing to get the employer match. Even if that stops (like the weasel at Motorola are doing) you still get to BANK the money and reduce you taxable income, so that is a slam dunk.

There ought to be the OPTION to invest in "stable value fund" or GNMAs or even "money market" as those are not going to go down. I understand that now every 401k has ALL those options, but they ought to have at least one.

If you believe the signs that more declines in stock funds are likely it would not make sense to continue to put money into those categories -- even if you are buy "more shared" but they continue to decline you are not getting ahead. You have to do some balancing and be on top of things enough to realize that you ought to SHIFT from the stable value funds to the stock funds when things turn.
A few places to start:
401khelpcenter.com - 401k Asset Allocation
Hands-off: Holders of 401(k) Retirement Accounts Are Not Your Typical Investors - Knowledge@Wharton
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Old 12-29-2008, 01:38 PM
 
Location: San Diego
2,518 posts, read 1,998,905 times
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Under no circumstances should you stop contributing to your 401(k) because of a hiccup in the market. In fact, you should be increasing your contributions because of the relative bargains everywhere in the market. It's called "Buy low, sell high", not the other way around as your (not so bright) friend suggested. My company stopped matching, which is lame, but I upped my contribution from 10% to 13%. Remember, every dollar you contribute to a 401(k) would only be about 75 cents if you didn't contribute (depending on the state you live in and your tax bracket). If you don't contribute, where is your retirement coming from? The only reason why contributing to the 401(k) would be bad is if this country was mired in a massive financial crisis with hyperinflation and the complete failure of the stock market. 1 dollar invested today in a 401(k) by a 27 year old is worth about $9 at retirement at age 65, and that's not counting the likely recovery that will bring that investment up at a rate higher than the standard 6%.

As a Investment Advisor and financial Paraplanner, I see plenty of people who neglected their 401(k) too much while they were young and are paying a price for it by having to work until age 70 or by cutting down on their lifestyle. Contributing to a 401(k) forces you to maintain a more frugal lifestyle (why it's called "salary reduction") while investing in a vehicle that can grow quite large because of the savings on tax. Say you make 40,000 a year and normally contribute 10%. Take two years off, and you're losing $8,000 in contributions, which after 20 years of growth can be worth 3 times that much, and after 30 years is worth 5 times as much. Every paycheck you take off of your 401(k) will hurt you exponentially down the road. Take advantage of it while you have it!
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Old 12-29-2008, 01:57 PM
 
28,449 posts, read 73,391,949 times
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What's a paraplanner?
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Old 12-29-2008, 02:03 PM
 
Location: Beautiful Lakes & Mountains of East TN
3,454 posts, read 6,712,311 times
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leftydan's a paraplanner.
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Old 12-29-2008, 02:16 PM
 
Location: Wouldn't you like to know?
9,114 posts, read 15,950,863 times
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This is how I do it from top to bottom...

Roth IRA
401k up to match
529 plan
401k from match to max
taxable accounts
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Old 12-29-2008, 03:39 PM
 
Location: Los Angeles Area
3,306 posts, read 3,551,660 times
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Dollar cost averaging only works when you consistently buy into the market at regular intervals regardless of the direction of the market. Trying to buy more "when the market is low" is also not dollar cost averaging though.

Personally, I don't completely agree with dollar cost averaging as I think you should react to major economic events. But, the time to do this was over a year ago. But its funny, how bad people are at sticking with something so simple: Put $X into your 401(k) every month regardless of market conditions.

Most people are just finding out that they weren't comfortable with their asset allocation, so they should adjust it to something they are more comfortable with (and stick to it) and continue to contribute. Stopping contributions is just pretty stupid....
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Old 12-29-2008, 04:01 PM
 
Location: Apple Valley Calif
7,474 posts, read 20,665,983 times
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I agree with leftydan, invest all you can while the prices are low. By the time you need the money you will have made a killing.
I hear people at work say to stop investing in 401k because of the state of the economy. Those people couldn't be more wrong, and they will be hitting you up for a loan when they retire....
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Old 12-29-2008, 04:04 PM
 
1,282 posts, read 2,305,245 times
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Thank you all for the help. As of now, I am at -50% and its been that way for awhile. I really need to take some time to analyze where my money is being contributed to. And I also start reseraching 401k. Thank you all

I have a quick question.

For instance, say I do not want to contribute 30% of my contributions to Fund X anymore, and I take the 30% and contribute to Fund Y. How does that work? Will all the money and holdings I have vested in Fund X up to this point get transfered to to Fund Y? Or will all the money I vested in Fund X stay there forever and the new 30% contributions go to Fund Y?

Thanks.
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