At Work

Time to panic? $$$$$$

Back in 2008/2009 I received a lot of questions from employees about what to do with their 401k plans. 

I suggested they (1) not move money out of the equity funds and (2) continue or start investing in equity funds. Most panicked and move funds out of equity at the lows. All those who did locked in their loses. 

Here we go again. 

  
If you panic now and start moving out of the stock market, you will again lock in your loses. For my part at age 72 and already retired I am moving a little more into equity … and I’m a very conservative invester; actually too conservative. 

Time is your friend. If you are not sure, ask a professional for help. 

What are you doing in these turbulent times?

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Categories: At Work, Retirement

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13 replies »

  1. Go ahead and laugh but I like to plow forward with my eyes closed. I just don’t open my statements for a while and block out the news.

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    • That’s the right thing to do in my view and what most people don’t do. The only caveat is to change the mix of investments as one approaches retirement or otherwise plans to use the funds.

      Liked by 1 person

  2. I have been saying for a while that the stock market has not been giving 8% returns for the last decade. My 401k has only returned about 2.44%. I always thought it was because I was just doing simple math, that is the current value divided by total of all contributions.

    http://dqydj.net/dow-jones-return-calculator/ has a calculator that gives the Dow Jones return from a given year with and without dividend reinvestment both are adjusted for inflation. Since 2005 the DJIA has returned 2.761% without reinvestment and 5.382% with reinvestment. Now take off your fund management fees and there is no way that your average 401K is going to make even 7% in the last decade. As for me, I have some bond funds that help drive down my overall 401K returns.

    I wish the financial advisers would update their models to reality that I have been seeing since 9/11. I also wish I had more conservative and bond funds that I could sell and buy into equities but no such luck. I always seem to buy high and sell low no matter what I do. And for the record, I am not going to panic and sell, I am still listening to my adviser.

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    • An average return of 7% is realistic but you must include reinvestment of dividends and to maximize the return you must also consider the impact of ongoing investments to maximize cost averaging.

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      • 7% is not realistic. I just checked the 10 year returns on my 401K and the large, mid and small cap funds are only returning 7% to 8% before fees and these are the best funds. The reason 7% return is not realistic is that a good diverse portfolio should have some bond and stable income funds which happen to have only returned a little better that 4% before fees. When you blend this mix together subtract the fees there is no way you can get a 7% return over time.

        According most standard wisdom, I should have my age in conservative funds. My financial adviser likes the fact that I can accept more risk and have more money in equities than bonds and I still can’t hit 7%. In the last half of my working career where I have been able to invest about 75% of my money, I have invested during some of the worst bubbles that there were and that has hurt my portfolio. Because of the bubbles I seem to be on the wrong side of the cost averaging theories.

        I’ll give you another example of my lousy investment skills with something that you should know about. I bought PEG stock through payroll deduction for 23 years. Can’t lose right? By 2012 I was tired of the loses so I sold it to payoff my mortgage which getting out of debt was a much better use of my money. For IRS capital gains purposes, I only had $19 in capital gains over 23 years. How is that possible? During the early 2000’s PEG stock started sky rocketing during the failed Excelon merger and I was buying more stock in the 2000’s than I could afford in late 1980’s. Buying one share at $100 and then selling for $30.24 wiped out all gains on several shares bought at $20 something. As you know four years later the stock has only recovered to about $39-$40 a share. I do not have enough life left in me to wait for the comeback.

        IF the stock market could returned 7% year after year and with bonds only returning in the 4% range year after year (for the last 10 years), if you follow any kind of diversification strategies then there is no way you can ever hit a 7% return. Financial advisers need to stop using antiquated historical numbers on building portfolios expectations. These may have work with old money (pre-2000) but I have not seem such numbers in the last 15 years.

        Therefore that is why I feel that 7% returns on a portfolio are unrealistic.

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      • It depends on the persons age. Younger people should be all in stocks. Plus a good plan will have fees much less than 1%

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      • I clicked on the link to the blog you wrote on 12-14-2010 to encourage investing in 401Ks and 100% income replacement. In that article you had the 10 yr rate of return for the same 401K I speak of. Bonds 5.70%, Large Cap 4.50%, Mid Cap 1.90%, and the only fund over 7% was….Small cap at 7.4%. If you had your portfolio split evenly between the funds (that’s only 25% in bonds not stable value fund) for the decade of 2000, your return would have been only 4.875% before any fees. That is much less than 7% total return.

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      • That was an example of one plan and it’s the mix that counts and of course the period of time you pick to measure.

        The historical average of the S&P is 10%

        “One of the major problems for an investor looking at that 10% average return figure and mistakenly expecting to realize a nice yearly profit from investing in the S&P 500 is inflation. Adjusted for inflation, the historical average annual return is only around 7%. There is an additional problem posed by the question of whether that inflation-adjusted average is accurate since the adjustment is done using the inflation figures from the Consumer Price Index (CPI), whose numbers many analysts believe vastly understate the true inflation rate.

        For an individual’s investment success, when he chooses to enter the market makes a significant difference. The stock market performed very well for an investor who bought stocks between 1950 and 1965, but the market was nothing but a continuous 15-year disappointment for an investor who entered in 1965. The market’s best sustained performance was from 1983 to 2000.

        A significant detail about the historical S&P returns is that nearly half, over 40%, of the gains made over the years come from dividends. Calculating in the effect of an investor reinvesting all dividends received would render the historical performance figure substantially higher.”

        Read more: What is the average annual return for the S&P 500? | Investopedia http://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp#ixzz3xe6pEVWl
        Follow us: Investopedia on Facebook

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      • This may be historically true but it is of little comfort to my fellow workers some of which were born in the 1990s. Your saving success is highly dependent on when the bulk of your money is invested and for me that has been the last 15 years or the last half of my working life. I’ll be happy if I get a 4% return after 35 years of working and investing. The contribution pension appears to be providing about a retirement income of around 30% instead of 60% for a standard defined pension (not sure on my facts here because I do not have the contribution plan). This results in a young worker needing twice as much saved as I do.

        As little as 10 years ago advisers were saying 8% return on the market and now you say 7%. I say reality is closer to 5% with dividend reinvestment. The sooner the young people realize this the sooner they can make adjustments because by the time they are in their fifties, it is too late for a major correction unless they can work until they are 75.

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  3. Most experts are saying returns over the next few decades are going to be lower.

    Well, if you’re saving for a retirement that’s still off in the future, the possibility of lower future returns means you should plan on saving more. For example, a 35-year-old who earns $50,000 a year, receives 2% annual raises and already has $50,000 saved in a 401(k) or similar retirement account would have to contribute about 11% of salary over the next 30 years to have $1 million at retirement, assuming a 7% annual return (8% minus 1% a year in expenses).

    The only problem I see is a CPI inflation calculator shows over the last 30 years $1,000,000 dollars has lost over 50% of it’s buying power. You would need $2,205,724 to equal the same buying power $1,000,000 had in 1985.

    It is true what they say $1,000,000 just does not buy what it used to. I tell my kids now in their 20s and 30s to save 20%, because you are going to need it.

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      • So, far my the 2 sons, single, age 36 and 29 are saving over 20% if you count the company match. My daughter who is 35, with 2 young children, has a husband who is active duty career Army, Debt free except for house payment and car, saving about 5%. The youngest daughter 25, working part time, living with her sister to help out with newborn, so no savings or debt.
        I know they are doing better than many in today’s economy and spent almost nothing on Christmas, about $200 each. All four have no credit card debt and only 2 have car payments. I have not had a car payment since 1986, 10 cars in 30 years, cash for every one.

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  4. Unless you are in the Market seeking quick and easy positive returns on your investment in a highly risky, volatile stock hold your groun or shift to a mire conservative fund.

    There are safe guards in place that were not available in the ’20s. Your expectations tend to drive your decisions. Clearly unless the world markets crash, you are probably wise to shift from volatile to conservative.

    If you are a hot shot and thrive on high risks then you probably are prepared for the worst and can live with the outcome.

    Review your expectations and be guided by professional services of which I am not.

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