401K Investments: Why buy stocks at all? (VANITY)

self | 7/24/2002 | Huck

[Huck]

Ping

[RolandBurnam]

in any normal 401k, you should be able to move all your money to another fund type within the same family that you are offered. (according to the rules of your fund family)

for instance, you could move into a bond fund or money markey and get out of the stock market...

[ArrogantBustard]

It doesn't change what you already bought.

Every 401(k) or similar plan I have ever seen allows transferring investments from "Fund A" to "Fund B" at any time. Thus, as one approaches retirement, one can attempt to protect one's holdings by transferring them from "Risky High Tech Equity Fund" to "Completely 'Safe' Money Market Fund" or some such.

AB

[Huck]

If this is so, I don't understand how anyone so close to retirement gets burned. They should be out of the market at that point.

[TightSqueeze]

Huck, good post. I would add another reason to keep the investment risk low in your retirement account is that with 401(k)’a and IRA’s money lost due to bad investment is not subject to refunding from other sources.

[Aaron_A]

If the stock market and the economy tanks (really tanks), those bonds won't be worth much.

[Alberta's Child]

Good post. In general, it makes sense to gradually re-weight your portfolio as you get older so that your stock "share" decreases (say, from 95% at age 25, to 90% at age 30, etc.) and your fixed-income "share" increases.

Having said that, you should also be aware that moving out of stocks completely even when you retire isn't a great idea. Someone who retires at 65 has a very good chance of living another 20-30 years, so your assets will have to continue to grow even though you may not be adding to them.

It's also worth noting that in one sense, fixed-income securities are actually very risky investments because there is a chance that they won't even exceed the rate of inflation over the long term.

[Gorzaloon]

Your 401K is one of the most inflexible or illiquid investments you have. You can change your elections often, but that only affects what you buy next.

I can change the mix, past and future, of my Fidelity account up to six times a quarter. It depends on which plan the company is able to set up.

I lost a little money a month ago, but have pretty much recovered it the last few days after moving the little that was still in stocks to money markets and bonds. This week, I even made a tiny amount...Tiny, but at least it has not been a loss.

At this point I will gratefully take "tiny"! What a month.

[Huck]

It's also worth noting that in one sense, fixed-income securities are actually very risky investments because there is a chance that they won't even exceed the rate of inflation over the long term.

Am I wrong to consider the company match as covering that risk?

[Pentagram]

If these things are true, why not make the 401K entirely conservative?

Greed.

[Huck]

Someone who retires at 65 has a very good chance of living another 20-30 years, so your assets will have to continue to grow even though you may not be adding to them

Lord willing. I hope that my assumptions are decent as far as what I will need when I retire. It's hard to know for sure--I am only 34 now--but if I can accumulate enough of a nut to finance my projected goals, why risk any more than I have to? (In case you haven't noticed, I am trying to mitigate risk wherever possible.)

[Huck]

At this point I will gratefully take "tiny"!

Yup. If I had known I could do it--I just looked it up and I can reallocate funds--I would have moved my whole nut out of stocks back in January. Oh well. Live and learn. As it is, my safe funds are doing 3% each and my accumulated stock is down 13%. Ouch.

[ArrogantBustard]

They should be out of the market at that point.

If they really are close to retirement, I agree. Some of them (Enron folks, for example) had huge holdings in their own employer's stock. That completely evaporated. Some are just lazy. Since 401(k) et al. are self directed, some attention is required.

[Alberta's Child]

I wasn't talking about 401(k) accounts in particular, but about something like T-bills or CDs in general. If you are locked into a 5% return on an investment for five years, and the inflation rate increases from 3% to 5%, you are basically breaking even.

I don't think you should consider the company match at all when making investment decisions, mainly because it isn't guaranteed over time. The company could decide to reduce it, eliminate it, or even go out of business altogether.

One more item about inflation: People may think that inflation is low, but to be more accurate you have to consider the rate of inflation for things that you expect to spend your money on. I really don't care, for example, if the average annual increase in the cost of golf clubs is only 1.5% -- I don't play golf.

[Alberta's Child]

The "ouch" part of your post is interesting. If you are 34 and you are investing for retirement, then the current slide in the stock market shouldn't bother you. You are more concerned about where the stock market will be in 2030 then in where it will be next week, next month, or even five years from now.

I'm also 34, and I simply buy a specific dollar value of shares in various mutual funds every month (both inside and outside my 401(k) account). I couldn't tell you how much I've "lost" in the last two years, since the "loss" in the short term is just as meaningless as the "gains" were five years ago.

[Gorzaloon]

It has been pretty depressing to walk around and see the expressions on people's faces at Work.

Everyone told me I was crazy to get out of stocks. Now people are avoiding eye contact, and damned if I am going to say a word.

Wednesday is a bad day for a workplace lynching.

Well, I always said I would never really retire, anyway.

[fogarty]

"If these things are true, why not make the 401K entirely conservative? If you get a company match of even 3%, you are beating inflation right out of the gate. Get another 3-6% yield on a mixture of bonds and fixed income funds, and you can get a healthy 6-8% return."

Exactly. Which is why I am entirely happy with a 6% annual return and all my retirement accounts are in treasuries and bonds. Inflation has been out of the picture so long that a 6% return is more than acceptable.

Of course, the mantra of the past 10 years has been "The stock market always outperforms every other investment over time." If you've got 40 years before retirement, this is true. The problem is - the majority of workers DO NOT have 40 years till retirement.

But even now, CNNFN and MSNBC 'experts' are recommending workers in their 40's and 50's to put 75-80% of their 401k assets into stocks! Makes me wonder what kind of kickback these experts are getting from the mutual fund companies. Let us not forget that after 1929 it took thirty years for stocks to get back just to their previous levels.

[Huck]

The "ouch" part of your post is interesting. If you are 34 and you are investing for retirement, then the current slide in the stock market shouldn't bother you. You are more concerned about where the stock market will be in 2030 then in where it will be next week, next month, or even five years from now.

You could be right. As you can see, I am not too swift on this stuff. My thinking is that my interest in the future of the market is reflected in my elections--in what I am buying. It seems to me that if I had moved my funds from stocks, which have lost value, into bonds, which have gained value, my current net worth would be higher, and later on I could move funds back into stocks with plenty of time to realize more gains over time. Not to totally micromanage--I am not trying to day trade my retirement funds--but if I believed in January that stocks would slide further, I should have moved them. If I believe that I don't have to be the first one back in the pool after a bear market, then I could have waited for a good quarter before reallocating back into stocks. That's not overmanaging, is it?

[Huck]

Good points on inflation risk. I need to research the data on that, to build in good projections. Thanks.