Stay the course--Hit the iceberg.

Type the phrase "401k" into any news search engine and you will get the same results: An endless stream of articles advising you to the stay the course. In fact, it's the 401k industry's mantra. Yahoo! Finance has even started publishing a Fidelity-sponsored daily column called Focus on Retirement. Ad nauseum, the columns invariably tell you to do the following:

1. Avoid withdrawals and the associated 30% penalties.
2. Ignore market losses and don't reallocate your choices.
3. Maintain the same level of contributions, despite economic hardships or contribution match reductions.

They justify this advice by implying that you will miss the rally if you move/remove your retirement funds. You'll read how this is a "buyer's market" and that dollar-cost averaging will reduce the effects of any market downturns. In fact, you'll read it so often that you'll have trouble distinguishing one article from another. Now, if you're like most 401(k) participants, your account is probably down 30 to 50%. How did you get there? By staying the course, most likely. If you followed the above items during 2008, you got hurt and hurt badly.

Unfortunately, I have very little time this evening. In the future, I will post much more about defined contribution plans. In the mean time, in light of what appears to be another distinct stock market decline, I'd be thinking about reducing my retirement account's stock market exposure. The easiest way to do this is to reallocate your assets into the money market fund in your plan. This leads to the following possibilities:

1. I'm wrong and you will miss the end of the recession and the subsequent super-rally where the DJIA starts its return to 14,000 for it's current level of 8,200. It's possible, but judging by the death spiral our economy is in, it's not probable.

2. I'm wrong and the markets remain flat. You will remain at par with either option.

3. I'm right and you miss significant, additional losses as the markets probe new lows. Depending on your age and 401(k) assets, additional losses may become irreparable. In another words, it may be more desirable to risk missing a 10% gain than experiencing a 10% loss.

Obviously, the best thing for you to do is educate yourself on the details of your 401(k) and make your own decision. I urge you to do this and do it sooner than later. Good luck.

1 comment:

  1. A common 'stay the course' argument is that most market gain is realized in relatively few days, so you have to 'stay in' to ensure you catch them. Of course, this argument ignores the fact that most market loss is also realized in relatively few days. As you've noted, there can be value in stepping aside during rough times.