Help! My 401(k) is Losing Money!
By Patrick on Oct 10, 2008 in Investing
This past week my workplace was abuzz with conversations regarding how much money people lost in their 401(k) plans. I’m sure similar conversations were going on just about everywhere. With the recent difficulties in the market place and the worldwide economy, it’s almost inevitable that you lost some money in your retirement accounts. I’ve lost quite a bit! But I’m not overly concerned about it right now (partly because I have about 30 years until retirement). I know that corrections and even major drops like this will happen. I plan on staying the course and continuing to invest for my retirement. I
What you should do with your 401(k) in this market
Don’t panic. Panic is never a good thing. Panic causes people to make irrational and often detrimental decisions. Look at your situation and assess your options.
Look at your asset allocation. If your retirement holdings are properly allocated, you are in a good position to weather the storm. Generally, the closer you are to retirement, the more conservative you want to be with your investments. The further out you are, the more flexibility you have in regard to risk. You may find that you need to make a few adjustments after the dust settles, but maintaining a good allocation will make it easier to get your portfolio back on track.
Don’t withdraw your funds. Even though you may have lost money in your account, it’s better to leave your money in your 401(k) plan, otherwise you may face stiff early withdrawal penalties that will compound your current losses. Rebalancing your portfolio now and moving assets from equities into fixed return assets could be a case of selling low - which is the wrong thing to do.
Continue your contributing to your 401(k). If you are uncomfortable putting your money into the stock market right now, then consider making your contributions into a cash or money market fund if you have one available. You can also consider maintaining your contributions in their current funds. Remember, with dollar cost averaging you will buy more shares when prices are low which is a good thing when it comes time to sell. It’s true that the markets may continue to drop, but you never now when or how much. The more money you get in at lower prices, the more money you can potentially make when the markets increase.
I’m holding steady
I’ve lost quite a bit of money in the last few weeks - and it hurts to look at accounts that are 40% lower than they were just a couple months ago. But I’m looking at my 401(k) account (and my IRAs and other accounts) for what they are - retirement accounts. I have 30 years before I will be eligible to make withdrawals and I know that between now and then the markets are bound to recover. My job now is to make sure I stick to my game plan and maintain a solid asset allocation. The more money I pump into my retirement accounts now, the easier my life should be when I reach retirement age. And I know that old me will thank young me for sticking to the game plan, even when it looked like the sky was falling.
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14 Comment(s)
By Miranda on Oct 10, 2008 | Reply
Thanks for this measured, practical post. We need more thoughts along this line. It’s time to stem the rising tide of panic.
By Pinyo on Oct 10, 2008 | Reply
Great article Patrick. It’s troubling what’s going on right now, but you’re right. The day we need money is a long way off and the best course of action is to stay the course. That’s what I am doing and that’s what’s a lot of my readers are saying they are doing.
By Dividend Growth Investor on Oct 10, 2008 | Reply
Great article. Rebalancing from stocks to fixed income might not be a good idea right now however. Maybe the other way around.
If you have at least 20 years to retirement, then why bother selling and locking in capital losses when the likelihood of the market increasing over the next 2 decades is pretty high..
By Chad @ Sentient Money on Oct 10, 2008 | Reply
I couldn’t disagree with you more on:
“It’s OK to rebalance your funds or move some of your holdings from equities to a cash or money market fund if you are risk averse and the market scares you.”
If you are making this decision now, you have made a huge mistake. You have to make this decision when you initially put your cash in. Making it now is like running the Boston Marathon, taking the pain, and then pulling out at the 25 mile mark. Why experience all the pain, but not experience the euphoria of finishing. You have experienced 80% to 90% of the pain now, just leave it in. Selling of this type signals a bottom. Don’t buy at the top and sell at the bottom.
By Patrick on Oct 10, 2008 | Reply
DGI, Very good point. I think putting more money in equities is an opportunity right now. But it is certainly better to keep the funds in a retirement account instead of withdrawing the funds as cash.
By Patrick on Oct 10, 2008 | Reply
Chad, You’re right. I don’t think I should have written it that way. My thought behind that statement was that it is better to keep you money in your retirement account instead of withdrawing funds and taking penalties. I think exchanging equities after they have lost a lot of value is selling low and doing the exact opposite of what one should do. Thanks for pointing this out, and I will modify the article to reflect that.
By Chad @ Sentient Money on Oct 10, 2008 | Reply
I agree with that. No one should take this loss and then take a penalty by removing money from their 401k early.
By Alisa on Oct 11, 2008 | Reply
Very sound investing advice. I agree that it will pay off in the long run to hold steady. Why take a loss, when, chances are, your portfolio is due for a rebound. Even if it takes some time. And also, why take on the penalties that go along with cashing in early? It’s not easy… but as it was mentioned… this may be a good opportunity to increase shares at a lower price.
Be well.
By Dan on Oct 13, 2008 | Reply
It amazes me how many otherwise very intelligent people I know are looking to pull their money out of their 401k’s now. They believe they’re cutting their losses, but as everyone else mentioned on this thread, what they’re really doing is guaranteeing a negative return. And they look at me like I’m nuts.
By Mary on Oct 24, 2008 | Reply
Great advice, actually addressed most of my concerns. I was almost pulled into withdrawing since I lost so much in my 401K. I’m not ready to retire no time soon, and feel that things will get better in the long hall.
Thanks to everyone, we need more positive post like these.
By Patrick on Oct 26, 2008 | Reply
Mary: Glad to hear you decided against withdrawing your funds! You have plenty of time to recoup your investments, and over the long haul, I think you’ll be happy you left the money in.
By frannie on Nov 11, 2008 | Reply
I have lost over 40K during this rollerball stock market. I am over 65 and have less than 150K left. I am so scared. What are my options?
By vern miller on Nov 22, 2008 | Reply
The advice of the threads are good,but one question is at hand,just for kicks and giggles what if the world we live in doesn’t get any better in the future?.What if the smart investors take the risk and REMOVE their 401k money and invest in a more secure market.I sometimes think cutting your losses in a crazy “no one knows what the future will bring world” is not a bad thing.
By Patrick on Nov 23, 2008 | Reply
Vern: It’s always good to ask “what-if?” But be careful taking money out because not only will you lock in losses, but you may incur stiff early withdrawal penalties. If you are concerned with the direction of the market it would be better to leave the money in an IRA, 401(k), or other retirement account, and transfer the funds from equities to cash equivalents that are guaranteed - such as a CD or government bonds. That way you do not incur penalties and earn a guaranteed return. When/if you feel better about the market you can move more money back into equities. But the problem with doing this is that you may lock in losses now and not move your money back into equities before prices go back up.