Your Two Bits

Since last week’s post regarding whether to keep contributing to a 401(k) if your employer drops the match, I have had a few discussions with people on this topic. Last week’s post was written assuming that you are going to keep contributing to some form of retirement investment; however some people have asked, if they should stop contributing to all investments. The short answer is “No.” The longer is answer is “It depends, and here’s why.”

In general, you really don’t want to lose any of that retirement savings momentum. That’s why the short answer is “No.” However, there may be exceptions. One person asked if they should stop contributing to the 401(k) so that they could build up their emergency savings. My gut reaction was to say to keep contributing; however, as I pondered the issue, I changed my mind a bit.

First of all, if a company is freezing its 401(k) match, that is most likely because they are struggling financially to some extent. If the company is struggling financially, you may have reason to worry about your job. Depending on your debts and amount of emergency savings, you may want to build your cash reserves in the short term. In this case, I am more open (albeit still very nervous) to stopping contributions to the 401(k) and not investing anywhere else. However, my openness comes with some caveats.

Create a Plan
Do not stop making contributions until you have a plan of action in place. This plan should include a few critical elements:

1. Determine how much money you are going to save. In other words, at what point will you be ready to begin contributing again? Write down an actual dollar value.
2. Once you reach your desired dollar value, are you going to begin contributions to your 401(k) or invest in something else? If something else, have that something else already selected. I would suggest even going so far as filling out the application with all but the signature and date.
3. Determine an alternate investment, in case re-investing in your company’s 401(k) plan is not an option, either because the company no longer exists, or your position no longer exists, or you have to wait for open enrollment.
4. Save every penny that was going to your 401(k) when you stop making contributions.
5. To help you save every penny, at a minimum save the money in a savings account that is separate from your general checking account—even better would be an account in a completely different bank. I would look for something like a money market account; it might give an interest rate that helps you keep up with inflation.

Hopefully, you aren’t in a position where you feel the need to stop all contributions; however, if you are, at least have your “exit strategy” in place.

That’s my two bit’s worth. I’m interested to hear what thoughts others have.

Related Posts:

• Why Ride a Loser?
• Should I Change My 401(k) or Retirement Investments?
• Should I Pay Off Debt or Invest?
• If My Employer Drops the 401(k) Match, Should I Still Contribute?

With business tending to be slower for many right now, I have heard of cases where employers stopped matching employee 401(k) contributions. Along with the market’s downturn, this leaves people wondering what to do. What would you do if your employer stopped matching your 401(k) contributions? Here’s my two bits.

Did the employer drop the match temporarily or permanently? If permanently, unless I really liked the investment options in the 401(k) or the contributions lowered my income in a way that had significant tax implications, I would stop contributing. However, I would continue to invest essentially that same portion of my income to mutual funds I like, which I would set up as Roth IRAs to be automatically withdrawn from my checking account each month. That way it would still feel like I never have the option to spend that money.

If the employer dropped the match temporarily, it’s not as clear. If there is a decent chance they will begin matching again within a year, I would keep contributing to the 401(k). The reason being that it’s a little less hassle to keep it going and you don’t risk the possibility of failing to invest the money somewhere else. There may also be tax implications to your paycheck. However, if the employer won’t be matching contributions again for at least a year, or you really dislike your investment options, I would probably stop contributing.

Hopefully that situation doesn’t arise, for both your sake and your employer’s. If it does, just be sure to continue to invest the money somewhere either by contributing to the 401(k) or in other investments, such as mutual funds. In fact if you don’t trust yourself to be sufficiently disciplined to continue to invest that money, I would recommend that you simply stick with the 401(k).

Those are my two bits. What are yours?

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What do traffic jams teach us about investing? That investing is infuriating and you have no control over how your investments do, especially because of buffoons making the traffic jam worse? Not exactly. While there are plenty of buffoons who affect our investments, buffoons don’t control our investments (unless you are one or hire one, which would also make you one).

Aside from patience and long-suffering, freeway gridlock can illustrate good ways to approach investing. Have you ever noticed the car that keeps switching lanes, trying to get into the one that is moving the fastest at that moment? I have seen that countless times, and when I was younger, before I had much experience sitting in traffic jams, also did that. However, when I started commuting to work longer distances on a regular basis I tested my assumptions. Rather than anxiously watching for the lane that was moving at 8 miles per hour rather than 6 miles per hour like my current lane, I tried picking a lane and sticking with it. I tried inside, outside, and middle lanes. What I found was that generally, if I just got in what is normally the fast lane, I fared just as well as the fidgety speed demon trying to maneuver in and out of lanes but with a lot less stress.

I take that same approach to investing. Rather than trying to constantly pick the best new stock or mutual fund or any other random fad, I look for a good mutual fund that I can get in and ride. It may have its starts and stops, but I will get there with less stress than the person trying to time the market and having done better than the person who also picked a lane and stuck with it but only chose a CD fund. (View the short video illustration below, by clicking its Play button.)

Link zu Google (HTML in Multibox)

The fast lane tends to work best, if you have a longer time horizon. Likewise, if you are going to get off the freeway at the next exit or two, it may be best to stay in the slow lane to make sure you don’t miss your exit.

There are different ways you can approach investing and freeway congestion. A lot of it has to do with your attitude. If you want to keep life simple, just jump in the fast lane and be patient as you work through the jam.

There’s my two bits, what about yours?

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“Why should I stick with an investment that is losing value? That doesn’t make any sense.” This question was asked of me by the husband of the woman I mentioned last week, who had reallocated all of her 401(k).

In last week’s post I wrote about the guiding principle I use when trying to decide whether to stick with an investment or overall strategy, particularly in a down economy. Basically it helps to think long term.

This week I want to discuss why you might just want to ride that “loser” of an investment. Deciding to do so relies heavily on the type of investment. If it is part of your 401(k) or something similar where you are making regular purchases, it can be great. On the other hand, if you bought, say a mutual fund in one lump sum a year ago and don’t necessarily plan to buy any more, this may not apply as well.

The reason why is that the regular purchases mean you are still buying shares even though the value has gone down. Assuming that we are only going through a down cycle and that the market will eventually recover, you will be buying a lot more shares at a lower price than you had been when the economy was strong. Then as the economy recovers back to where it was, everything you bought while the economy was in a slump will increase significantly.

Look at this chart below for an example of how people tend to invest, causing their retirement to perform poorly.

Stock market performance from 1999-2009

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It is common for people to get scared and sell their investments or stop buying new shares as the economy’s growth starts to slow (A). Then, during the lowest point (between A and B), people do nothing because the economy and the market are doing so poorly. Finally, as the economy begins to recover, people gain confidence and reinvest in the market (B). However by that time they have missed out on the opportunity for great earnings.

Often, it takes a steady hand and a calm head to be patient and brave and ride the loser that can become a winner. We hear people lament they don’t have the luck to pick investments at the right time. Investing through a recession can make the difference.

That’s my take. Feel free to share your two bits.

Related Posts:

• If My Employer Drops the 401(k) Match, Should I Still Contribute (Part II)?
• Should I Change My 401(k) or Retirement Investments?
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• If My Employer Drops the 401(k) Match, Should I Still Contribute?

Are you considering switching around your 401(k) or retirement investments? Someone recently asked me if she had done the right thing by reallocating all of her money in her 401(k). TIAA-CREF manages her company’s 401(k). They primarily offer the employees 4-5 predefined options that can include domestic or international stocks, bonds, or real estate. Based on the mix, the 4-5 predefined options are given a classification, ranging from conservative to aggressive. The woman had moved all of her money from an “aggressive” predefined mix of funds to “ultra-conservative” money market funds.

She is not alone in this concern. I have heard others ask if they should reallocate how their retirement is invested or sell off certain investments entirely. Given the major swings—generally downward—that we have seen recently in the market and the overall economy, it is understandable that people would look for something safer, something guaranteed.

Market fluctuations can be painful. I’ll admit that I don’t check on my investments as much as I did six months or a year ago—the results aren’t as exciting. However, I also haven’t changed my strategy either, which is to invest in mutual funds that I think will do well over the long term, meaning at least five years.

How do we keep calm, and even optimistic, as we roll on these tempestuous market waves? For one, I would suggest spending less time watching the news, but I find it even more useful to ask myself a question: “Do I really think that my investments will be worth less than what they’re worth now, when I am ready to sell them?”

If the answer is “No,” why not stay with it? If the answer is “Yes” and is causing me to move all of my investments around, then along with getting out now I may want to buy a year’s supply of food. This assumes that most all of your other options are going through the same slump, which is generally the case with the current market.

Again, in the current economy, it’s easy to understand the desire to find a guaranteed return. Still, use caution when considering pulling all of your money out of one investment to put it in a “safer” place. If you’re like 99% of the rest of us, doing so right now will mean that you bought high and sold low. While it can be a little gut-wrenching to see your retirement or other investments way down in value, just ask yourself this guiding principle: “When I’m ready to sell, do I think this investment will be worth less than it is worth now?”

That’s my take, what are your two bits?

In my next post, I’ll further discuss why it may be great to stick with an investment that is losing value.

Related Posts:

• If My Employer Drops the 401(k) Match, Should I Still Contribute (Part II)?
• Why Ride a Loser?
• Should I Pay Off Debt or Invest?
• If My Employer Drops the 401(k) Match, Should I Still Contribute?