investing

What Should I do with my 401k?

Right now your 401k is down 20 to 50 percent and you are stunned! You’re asking yourself, what should I do? Stock market logic says not to sell right now, that markets go up over time and if you have a horizon beyond 10 years then you’ll be fine.

Well, that used to be true. The last year has wiped out anyone who has held to the “buy and hold” mantra the last 10 years. But isn’t this the time to buy, when stocks are “cheap”? Shouldn’t I dollar cost average to lower my cost basis? NO! At least not until we are out of this mess and we have an all-clear! The current credit crisis has everyone scrambling for the sidelines and everyone is not there yet. Baby Boomers, Banks, Hedge Funds, 401ks, IRA’s are all going to sell their stocks on rallies. Financial institutions have to de-leverage balance sheets. People close to retirement want out so they can have enough cash to survive. Hedge funds and mutual funds are facing massive redemptions from retail investors. All this means is that everyone is looking to sell at the first sign of a rise in the stock market.

Baby Boomers have controlled the booms and busts of our economy for the last 50 years. The housing market boom started in the 80’s when the first baby boomers bought their first homes. The second housing boom began in the 90’s when the second wave of baby boomers bought homes and the first wave moved into their second home. At the same time, 401ks and IRA’s became popular as Boomers started planning for retirement. The current housing bubble is then a result of a gap in demand. The current generation is not able to buy the houses that the baby boomers are selling off. This depreciation started in 2005 and is expected to last another 2 to 3 years. This is also the case with the stock market. Baby Boomers are looking to retire and want to get their money out of harm’s way. This means they will be selling and withdrawing their retirement accounts on any stock rally.

So what should you do? Do the same thing. If you see any rallies, from March 2009 – May 2009 in particular, you should get back some of the devastating losses you took over the past year. At this point, we suggest moving your money to a cash fund and wait. Place your 401k or IRA deposit into a cash fund. This also goes for investors who just started their retirement account as well. We should expect to see a market bottom between 2010 and 2012 depending on how our country manages the crisis. If we see any changes we will update you via our blog, so keep reading.


Discussion

4 comments for “What Should I do with my 401k?”

  1. Instead of cash, why not go for gold, bonds, municipal bonds, or just dividend paying stock etc?

    8% return or an inflation hedge is better in my mind than just holding cash.

    And longer than 10 year time horizons should consider purchasing as many shares of profitable companies with solid balance sheets as they can. Dividend paying utility companies are paying the same dividend, but a buy in now makes that % go from 2% to 6%, and you could assume that P/Es will not long term remain under 10.

    Posted by Stephen Reid | February 24, 2009, 3:32 pm
  2. Hey Stephen – I agree that all those are good things to look at especially for knowledgeable investors like yourself. But I still think they are very volatile given these economic conditions. The common defensive and value plays are still not working.

    Gold, bonds, and muni bonds can easily fall 25 to 50 percent if there is a flight back to equities.

    Also, with dividend paying utility companies the value of the stock is dropping more than the dividend so you end up losing value.

    There is a saying going around Wall St. that people are looking for the “return of capital” and not the “return on capital”. Cash is King.

    When you are not able to move in and out of positions on a weekly basis, then I suggest stay in cash until the markets are more settle. Otherwise, your capital is in harms way and subject to losses that are hard to come back from.

    Posted by TheMoneyMaven | February 24, 2009, 4:00 pm
  3. On the dividend and value: Today’s value doesn’t matter when we’re talking about 10-20 years down the road.

    The stock loss in value can actually be a positive when you look 10-30 years down the road on a trusted Utility with a AAA debt rating and monopolistic powers. Now that dividend that has stayed the same is buying more shares in the DRIP, which means it’s making 7.5% per year, every year, on more shares that are likely to increase when market volume comes again.

    As long as the stock price at worst stays the same over 20 years, then you’re alright.

    Posted by Stephen | February 24, 2009, 6:24 pm
  4. Thanks Stephen for responding again, I like the dialog but I would have to respectfully disagree.

    The Dow Jones Utility Sector as an example closed today at 340. You purchase 10k shares. I will say the market bowls for the next 5 years and the stock breaks even. Okay a 7.5% annual return after 5 years is a little less than 14,500.

    But if you keep your powder dry, say you buy 2 1/2 years later after the index drop another 20% decline. At the 5 year mark when the stock broke back even including the 7.5% dividend return, you will have 15k.

    Right now I’m under the assumption that the market is broken. So anyone who isn’t knowledgeable should not have money at risk because we are more likely to see Dow be cut in half again before it doubles and as long as that is the case, I say keep cash. In the post I talk about the massive selling that will have to go on for the coming years. If that is the case, cash will beat dividend yielding stocks any year.

    Posted by TheMoneyMaven | February 24, 2009, 10:50 pm

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