At Work

The average investor who stabs themselves in the back … and then. wonders why retirement is tough

And you wonder why many people envy the wealthy?

I was just talking with an elderly woman who has been retired for four years. She and her husband have “small” 401k plans from which they withdrew money to pay for the trip we are on.

“We lost so much money in the crash and we are just now getting back what we had before everything went down.” Just now! Say what?

Not being able to keep my big mouth shut I said “how is that possible?”

She stumbled trying to explain and it finally came out she didn’t want to lose any more and was not a “risk taker” so she took all her money out of stocks (and she wished she could have just put it in a bank savings account) and into fixed income in the 401k’s

This poor lady was way more of a risk taker than she knew, but not unlike many other Americans who may envy the wealthy, but who lack of knowledge to accumulate wealth themselves.

She lost money because of inflation as minimal as it may be now, but more important she lost the gains the stock market has made in the last nine years, gains that would have returned her paper loss (that she, and so many others, made real) and much more.

In addition, she has made a large withdrawal from the 401k for a trip thereby jeopardizing and income stream she may be counting on.

The reason the Buffets of the world are rich and grow richer is because they know how to invest for the long term and ride out the lows for future gains. Sure, you can say that’s easy because they have so much money losses don’t matter to them, but that’s not the point. The point is the strategy they employ and stay with over a lifetime.

If a person employs that strategy over a working life and gradually lowers the risk level near and in retirement and more toward income generation they can do well financially too.

But the truth is (based on my many years of experience with 401k plans) that most workers have no idea what the hell they are doing and put minimal effort into learning anything about investing or managing their money and that goes for young and old alike.

And that means, like the woman above, they will shortchange themselves and jeopardize a secure retirement.


1 reply »

  1. One of the first things I had to overcome was to believe in the long-term results of my 401K. When I first started, I “lost” money 4 out of the first 6 years. I still do not understand how that was possible, because the market lost money only one year during that time and I didn’t play with my funds. The fact of the matter was at the end of the year I had less money than sum of all that I put in to the fund. The statements were rolling quarterly percentages and they were all over the place and they didn’t help explain why. When you have a young family and at the end of a quarter you see that you lost an amount equal to a week’s pay, it is hard to believe in staying the course. But I did.

    In 1998, I invested in a highly rated index fund for my son’s college. Little did I know that it was tech heavy. I lost 40% in that fund as a result of the Tech Bubble crash. I stayed the course knowing that it should come back, then 9/11 happened. By 2003, I had to sell just so I would know exactly how much money I would have for college the following year. I lost 30%. But by then, I had the means to earn enough to cover that lost.

    I have stayed the course and the crash of 2008 saw my 401K drop by more than what I paid for my first house. Everybody can understand the pain and how hard it is to buy that first house. To get a 401K statement that showed you had “paper” loses for that amount of money may be too much for some to stomach. What if another 9/11 happens two years later? It is understandable that people who do not understand the market, run for cover.

    I was lucky enough to have a very large income and I was able to max out my 401K. It is not uncommon these days to watch my 401K swing day-to-day by thousands of dollars each day. Now I have statements that move in amounts that are as large as what my annual salary was back in the 1990’s. The daily percentage is small, but the amounts are more than most people have in the bank. It is very hard to keep the faith and not panic sell. It is tuff to get people to be into a religion when you cannot see the results for another 20-40 years. If you follow the saying a “bird in the hand is worth two in the bush” it becomes even harder to believe in long term results.

    As a bird hunter, who’s shot-to-kill ratio this year was terrible at 13.5%, you would think I’d just go to the store to buy a pheasant for a sure thing. Some investors cannot stomach missing just 1% of the time and they just want to go to a bank passbook account to get their sure thing.

    I wonder how bad I could be at fishing? They sell fish at the supermarkets for a reason.


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