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Starting a 401k now??

post #1 of 26
Thread Starter 
Just throwing out a question to everyone here that is more experienced with personal investing. Open season is coming up for our companies 401k and I was thinking about signing up. DH thinks I should have all the money going into the securities fund which guarantees a positive (but very low) rate of return. I think it would be a good time to at least put some in the stock indexes that I can get now at bargin prices, but I don't know if it's going to go any lower or bottom out. From what I understand, there are no capital gains or losses until I actually cash out the acct. I'm 39 so unfortunately I have plenty of time to wait for the market to recover. Any ideas?
post #2 of 26
I wouldn't but I am older than you. I had started in one early last year. I got out. The stock market is not going to get one red cent from me.
Except through what the govt gives them from my taxes.
post #3 of 26
I am almost 30 and I have both a 401k and a Roth that I am contributing to. This is the best time to do it IMO. Think of it this way - even though things are shaky now, you will be money ahead if you invest while the markets are down because you will actually have way more when they go back up.
post #4 of 26
I actually talked to my financial adviser a month ago (when I got my 401K statement OMG!!!) I lost over $40K in a 3 month period. Devastated doesn't begin to describe it. I wanted to immediately yank everything out, and put it into CDs. I have been hoping to be able to retire in 10's not looking so good anymore. He told me that I should tough it out. Statistically, the stock market has always recovered, and if I took my money out now, I'd never recover my losses. I'm completely financially un-savvy. I know surgery. I can earn money.....I can spend money. I have to rely on someone else's advice on how to invest it. I'm really hoping he's right. Laurie (LDG) knows about investments, and all that confusing stuff. Maybe you can PM her, and ask her advice. Good luck...I'll be watching this thread with interest!
post #5 of 26
I am not a risk taker. I would have yanked that money out in Septemer when the ca ca hit the fan Pookieboy. I refuse to throw good money after bad.
post #6 of 26
Historically, the markets have always rebounded and doubled value after a recession within a decade. I'm counting on that because I've lost a bunch too. The 401(k) guys came in last October with their spiel about how it's never been a better time to invest, blah blah blah. They should have saved it for a few months down the road. But really, a retirement account is for the long term. If you get in now you will be putting money into your future yadda yadda yadda. I don't know how your plan works, but with ours you can switch investment options any time, so you could always start out with the more in the conservative investments that your DH wants, and when the economy actually shows positive signs then transfer to a more long-term goal oriented strategy.

The mantra is always "Buy low, sell high". There hasn't been a low this low in over a decade, so these really are sale prices!
post #7 of 26
Investing in a 401(k) is always a good idea. Especially if your company matches some of you you put in. If you can't stomach the market ups and downs, your employers plan surely offers a money market or bond fund that you can invest in. Over time, stock funds will outperform those funds though. As others have pointed out, you can get stocks and stock funds at good prices now. But, if you do invest in stocks now, be aware that there may be further declines before the economy gets going again.
post #8 of 26
Most companies allow you to spread your investments within the 401K to both low risk and high risk choices. The rule of thumb for stock market investment is to buy low. Split your investments across different risk options if you are risk adverse.

I didn't lose that much in my 401K with the market crash. I did lose about 50% of my other investments which were higher risk. I'm not cashing in on anything and just waiting for them to rebound, even if that takes 10 years. It's insanity to buy high and sell low.

If your company matches, go for it. Money markets aren't earning squat right now and real estate is just plain wrong. Where else would you put your money? If you don't put some of it aside now, when will you start saving for your retirement?
post #9 of 26
We have a TIAA/CREF retirement plan through the university here, and even it's not doing so hot. However, I'm young (26) and have decades to go before I'm even able to touch it. So far, ON PAPER, I've lost 6k, but until I touch it, nothing happens. I'm OK with that.
post #10 of 26
Stocks are on sale right now! There's no reason to not invest as you would normally as what goes down, must come up!
post #11 of 26
While Gary and I believe the stock market is going lower (potentially a LOT lower) and that it is going to take quite some time to see any kind of recovery, if you've got a 30+ year time frame, I'd go for it. I would NOT invest all of it in the stock market. If you can split it 50/50 between some kind of bonds and equity - a "safe" bond fund or even low-rate CD, I'd go that route.

Heidi is right - here in the U.S., history indicates that stock markets rebound and recover within a decade after a recession. Gary and I do believe this is different - we think this is MUCH more like what happened in Japan during the 90s when their real estate bubble burst. The Japanese stock market is making 15 year lows right now. The accounts we manage are mostly cash, though we do have some gold investments in private producers, not publicly traded stocks. The stock market exposure we have is just 20% in those where we have the discretion to do it.

post #12 of 26
Even if it's another Japan (which I doubt because we aren't repeating their mistakes) for anyone under the age of 50 it would be foolhardy to take your money out and put it in cash equivalent funds. The major damage is already done. You can never tell where the bottom is going to be until you're halfway up the next hill. What difference does it make it you buy halfway down the downslope or halfway up the upslope? You're actually better off buying halfway down the downslope because in the interim you're collecting the dividends. And if those dividends are reinvested you end up with more than if you had waited. Work it out in a spreadsheet. I did.
post #13 of 26
One of the wisest (and wealthiest) men I know said, "The only way to get rich is to buy when nobody wants to buy, and sell when nobody wants to sell."

Under those rules, I'd say it's a great time to buy stocks.
post #14 of 26
Originally Posted by mrblanche View Post
One of the wisest (and wealthiest) men I know said, "The only way to get rich is to buy when nobody wants to buy, and sell when nobody wants to sell.".
You know Warren Buffet??? (wow, I'm impressed)
post #15 of 26
I'm in my mid-50's and continue to put money into my 401-K, especially in stocks, since I've got about 11-12 years to retirement, knock wood. You do, I think, have to sit down and really think about your risk tolerance, but I believe it's a great time to buy low, unless you're the kind of person who will be unable to sleep for worrying about your day to day losses/gains.

Yep, I lost 50% of my account this year, but, then again, without the 401k I wouldn't have had that money at all. Does your company offer a match or access to analysts to help you balance your funds?
post #16 of 26
Originally Posted by coaster View Post
You know Warren Buffet??? (wow, I'm impressed)
Actually, no. I was referring to a real estate broker I once worked for, by the name of C.P. Wright.

Buffett (who has been buying up stocks like crazy) said, "Be fearful when others are greedy, and greedy when others are fearful."

I think I related the story here of a truck driver I knew, once upon a time. I talked to him in about 1997, give or take. Trucking was a second career, a "hobby" career for him, after retiring from something else. He said on that Black Tuesday in October of 1987, he bought Wal-Mart stock all day long, until he had put every available penny he had in it. Wal-Mart lost half it's value that day.

In the next ten years after that, Wal-Mart stock doubled, split, doubled, split, doubled, split, and doubled again.

The trucker said he figured that one day of courage let him fully retire 5 years earlier than he had expected.

In that time, we bought Wal-Mart stock in 1990. We paid $500 for it. We sold that stock for $5000 about 3 years ago, to pay for a trailer to carry our hot rod.

And just to put the whole thing in perspective, Sam Walton was asked how he felt about losing half his wealth in that one day in 1987.

"What do you mean?" he asked. "Every store I had yesterday, I have today. Every warehouse I had yesterday, I have today. Every truck I had yesterday, I have today. Every employee I had yesterday, I have today. The stock is just a place marker. The 'wealth' was on paper. I didn't lose anything that really counted."

And the same thing is true today, for Wal-Mart and many other good companies (such as Toys R Us, where I work). The stock may not be worth as much as it was a year ago, but the companies are sound, and it will all come back.

Our IRA's (which were 401K's, but were converted when we quit working for Werner Enterprises) lost a ton of money. But I'm betting that 10 years from now, you won't be able to tell it.
post #17 of 26
I don't know about that not being able to tell it in ten years, though. Remember you need a 100% gain to make up a 50% loss. Now is an excellent time to get IN, to get started, but making up losses is another story.

As far as the Wal-Mart story, 1987 must be seen in context: that crash was just a minor blip compared to now. And the market recovered within a year. I think we're in this for a while, though I do think stocks will be better than parking in cash because of the dividends.
post #18 of 26
Originally Posted by coaster View Post
...though I do think stocks will be better than parking in cash because of the dividends.
Those dividends are being slashed at a record rate. In fact - the fastest rate in 53 years:

And this article was written Jan 23, so does not include the recent announcements by CBS, International Paper, GE, PNC, HSBC, JP Morgan - and these are not cuts of a few pennies - for the most part, they are cuts TO several pennies. That would not be my argument for investing in the stock market vs. cash.

post #19 of 26
I think they're being slashed as proactive defensive measures by the companies involved; good business decision-making IMO. The "few pennies" won't last. Historically during extended bear markets, the dividend yield on the S&P has been quite high; the number I recall is north of 5%. Seeing as how cash is essentially zero, and is likely to remain that way for some time, giving up that dividend yield has to be seen as the cost of risk avoidance, not as an investment. As an example MO right now is yielding over 8% so even if the dividend is cut in half, it's still way better than cash. And it's the compounding effect of reinvestment that really makes the case.

In his book The Future for Investors, Jeremy Siegel conducts a study on the performance of all of the stocks that originally comprised the S&P 500 when it was created in 1957. Looking at all of the stocks that were part of the original S&P 500 and still existed as of 2003, Dr. Siegel made an interesting discovery. Dr. Siegel states, "From 1897 through 2003, 97 percent of the total after-inflation accumulation from stocks comes from reinvesting dividends. Only 3 percent comes from capital gains.

Here's an interesting study of four different portfolios invested just prior to the 1929 crash, showing how much better the portfolio of the best dividend-paying stocks performed:

And there was an interesting discussion on CNBC today about what could be the next bubble to pop (meaning we're already in it) -- US Treasuries.
post #20 of 26
Of course they're being slashed as a defensive measure. I'll get data for you, but dividend increases lag, though I agree, it won't last... the question is how long it takes.

And using your MO example, if the stock is down 35%, and the dividend is only slashed by 50%, in five years, even with reinvesting dividends (I'm only compounding annually, so quarterly would raise the number), an original investment of 1,000 shares results in a loss of 21%. You MUST assume that the price of the stock will remain the same or increase. We are all used to believing that in 10 years stock prices will be higher. They aren't in Japan, and we think we're facing a similar scenario. So I think investing a portion of savings in a low-paying cash like vehicle is extremely prudent.

I'd also mention that the "best paying dividend" stocks are easy to pick after-the-fact. But 6 months ago (even just two months ago) those would be very different stocks than today. As to Dr. Siegel - I must be reading something wrong. But in real life who has a time horizon of 106 years?

post #21 of 26
P.S. We've been writing about the U.S. Treasury bubble since November.

post #22 of 26
Originally Posted by LDG View Post
And using your MO example, if the stock is down 35%, and the dividend is only slashed by 50%, in five years, even with reinvesting dividends (I'm only compounding annually, so quarterly would raise the number), an original investment of 1,000 shares results in a loss of 21%.
You're assuming the stock goes down another 35% from here, am I correct?

Five years is way too short a time horizon for a dividend-paying stock. Five years is way too short a time horizon for ANY stock.

Fact is, we're both making assumptions that present our own cases in best-light scenarios, and since nobody can forecast the future, either or both assumptions are just guesses, me taking historical data as the best case for making future assumptions, and you taking a more risk-averse worse-case future assumption. Me saying the future is going to be more like the past, and you saying it's going to be worse. Both are valid assumptions when making investment decisions; which to make depends on the client's goals, time horizon, and risk tolerance. Neither is correct for all. Only the actual passage of time will prove in hindsight which was the best course to take at the time.

The spreadsheet example I mentioned in a previous post (the one about halfway down vs. halfway up) made the following assumptions: 10 years, market starts at 10,000, declines to 5,000, stays at 5,000 for five years, then goes back to 10,000. Strategy #1 buys at 7500 on the way down, gets a 3% dividend yield, reinvests once at the end of each year, and holds. Strategy #2 puts the the funds in cash at 3% until the market reaches 7500 on the way back up, buys and then gets the 3% dividend and reinvests until the end of year 10. Strategy #1 beats strategy #2; not by much, but note that I made pretty conservative assumptions, not assumptions designed to prove the case. None of the assumptions were taken to prove one case or the other; they were taken on the basis of the likely lower and upper bounds on the yield, respectively. The stock dividend yield is likely to be in excess of 3% and the cash yield under 3%, which would give the advantage more decisively to to strategy #1.
post #23 of 26
Of course you're right. Just one addition or correction or whatever you want to call it - I wasn't trying to prove a case, just make a point. You made a pretty definitive statement about yield vs cash ("even if its dividend is cut in half, it's still way better than cash,") and I simply felt a need to point out the possibility that because a dividend yield is higher than the payment on a CD or something definitely does not guarantee that you end up with more money.

I did write before (in a different thread, I believe) that we're in print on our next bottom being around 5800 (being in your "NO WAY" category ) What you don't know is that we're in print on the possibility the market could fall another 45% from here (meaning from last night's close), but that IS (at least for right now) our worst-case scenario. We aren't alone (anymore): Shiller's data indicates the market could fall (worst case) another 55% from here.

Just another piece of potentially useless information: Japan's primary market index, the Nikkei 225, peaked at 38,916 on December 29, 1989. Of course there were many rallies and pull-backs along the way, but it closed last night at 7229, down 81% from its peak. It actually reached its low in October of last year (7162.9, down 82%). This is almost 20 years later. It's just that people here tend to turn to market behavior only in the U.S. None of our prior market bubbles were property-based asset bubble pops. Japan's was. Again, potentially useless information. But food for thought.

post #24 of 26
Originally Posted by LDG View Post
....Again, potentially useless information. But food for thought...
Well, no, not useless. Just all part of the recipe for the food.

Even in Japan during most of their decade and a half of going nowhere it was possible to make money.

Anyway, I think it's good for anybody reading this thread to get different opinions. I think it points out that there's no one approach that's suited for everyone. Anyone who wants to get serious about growing their net worth ought to find a good financial advisor and get some advice.
post #25 of 26
I just started a 401K...actually it was right after the "caca hit the fan" as said above... What's really freaky is that mine actually managed to GAIN some money since then. Weird, I know.

That said, our company had this little questionare which told you what percentages to put where based on your "risk tolerance". Because I'm in my 20's, I put a good bit in high risk areas. I figure by the time I'm ready to retire the market will have rebounded...or I can reevaluate after the market goes back up and move it to lower risk areas later on.

post #26 of 26
Just sock it away and don't pay much attention to it. Check your sectors once a year and adjust your contributions to keep the percentages where you want them.
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