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Now May Be a Good Time to INCREASE Investment Contributions

by Ryan Guina

The world economy is a volatile place right now. Even with last week’s recent gains, the stock market is down substantially over the last few weeks and it is down almost 40% on the year. While that is cause for concern for those at or near retirement age, it might actually present a buying opportunity for those who have a longer investment horizon. With my retirement approximately 30 years out, I look at the current market as an opportunity to buy at a big discount.

Why might this be a buying opportunity? Because it is always better to buy low and sell high. If you’re in it for the long run, you have a long time for your shares to gain value. Right now with stocks low across the board, you may be buying shares that will substantially increase in value over time.

A few days ago, Warren Buffet wrote an op-ed piece for the NY Times, Buy American. I Am. If you missed it, I highly recommend reading it. Warren Buffet is one of the world’s most successful investors, and when he talks, people listen. One of his most famous investment quotes is this:

Be fearful when others are greedy, and be greedy when others are fearful.

Right now people are fearful around the world, and with prices discounted as they are, now is the time to be greedy. But don’t be subjected to  blind greed. If you choose to invest now, go in with a plan.

Take advantage of this buying opportunity

Don’t worry about market timing. I could stress over the daily fluctuations and fractional changes of each share but I won’t. It is impossible to guess when the market will truly bottom out. And trying to do so is bad for the body, mind, and soul. But it is easy to recognize that almost the entire market is substantially discounted right now. Value averaging is the investment strategy of investing more money when stocks drop in price, and this may be the textbook example of when to do that. These opportunities are few and far between and I plan on taking advantage of this one.

Want Warren’s advice on this one?

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

Invest with a plan. Don’t blindly throw money at a stock you know was priced higher a few months ago. Instead, buy based upon your investment goals and maintain a balanced asset allocation. Otherwise you are asking for disaster.

How to take advantage of this buying opportunity

Increase your 401(k) contributions. Adding even as little as 1% can make a difference in the long run, and you probably won’t even notice it in the short term. If you can squeeze more out of your budget, go ahead and try. If it gets tight you can always bring down your contributions later.

Max out your IRA. Your IRA is another great place to stash the extra cash. You can invest up to a combined $5,000 in a Roth or Traditional IRA in 2008. If you haven’t opened an IRA yet, there are several places you can do that, including with your bank or in a brokerage account.

Invest in taxable accounts. If you have already maxed out your retirement accounts, or you think you will need the money before retirement, then consider investing in taxable accounts. I personally have accounts with Vanguard and TradeKing and recommend both of them.

Be responsible with your investments

We may be in this bear market for several months and perhaps more than a year. Don’t invest with money that you need right now. You should only invest with money that you can afford to leave in equities for 5-7 years, if not longer. There are never any guarantees and if you are gambling with rent money, you are asking for disaster. Pay your regular bills – they have a guaranteed return on investment. If you are closer to retirement, consider placing extra funds toward your mortgage, retiring debt, or placing it in safer investments. But if you are young, have a long term investment horizon, and have some extra cash to stash, the current market may just be a golden buying opportunity.


Published or updated October 20, 2008.
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{ 13 comments… read them below or add one }

1 Hank

This is some great advice. Usually I up my 401k 1% every January because of a pay raise. This year, I think that I will increase my contributions early to take advantage of the low stock prices out there.

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2 Ryan

Thanks, Miranda. I’m definitely going to max out my Roth IRA this year, and I recently increased my 401(k) contributions to funnel away as much as I can by year end. I’ve got 30 years before I can take retirement withdrawals, and the more I put away now, the less I need to invest later.

Hank, good idea. I think most people can up their 401(k) contributions by 1% without noticing much difference in their take home pay.

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3 Miranda

Thanks for the great article! I think it’s a good time to take a deep breath and consider individual needs. I am upping my Roth IRA contributions. Now is a great time to reach my goal of maxing out for this year.

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4 Dividend Growth Investor

I think that now is the time to keep contributing to your 401K and not mess with your asset allocation. If you can afford to increase your contributions, fine, if not that’s ok as long as you don’t decrease them because you are afraid the market is going to go to zero.
Anyways, my research has shown to me that every dollar that you invest in stocks now will generate about 1 dollar in income 35-40 years from now. At least that has been true from 1920-2008..

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5 Ryan

DGI: I’m not changing my allocation right now, but I have increased contributions. I think I will wait until the New Year or until things stabilize a little before making changes to allocation. I’m hoping things stay low through the beginning of the year so I can do a lump sum investment in my Roth IRA. I may also front load my 401(k) contributions as well to try and get more money in while the markets are lower.

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6 Eric

I left my 401k alone, I’m already pumping in over 12%. I think next year I may start an IRA also!

This week I re activated my automatic investing portfolio on sharebuilder after some modification. I’ve been watching [the market] all year and have been writing down companies that I have been interested in, have discovered, or that seemed to brave out this storm. Are we at the bottom? Who knows, regardless I’m putting more money in now! It’s bound to go up and I don’t need the money any time soon! YEY Discount rack of the stock market!

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7 Pinyo

I am buying more. In fact, I just add another $5,500 to our retirement accounts. Now I just have to decide what to buy.

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8 imDavidLee

Luckily got successful people came out to give some good words else i feel worry all the while because i invest a lot in unit trust and retirement fund…

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9 Adam

Hi,
I’m a young guy 23, and I don’t have a 401k or any retirement set up from my current employer. I don’t really have a whole lot of cash to work with but I’m just wondering what would be the smartest move for me at this point. Any advice would be greatly appreciated.
Thanks,
Adam

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10 Paul Creamer

If you have a 401k where the employer contributs – max it out to what they will contribute to… ie; if max they match is 6% you do as much as needed to get that.

Afterward, go IRA or externally and do tax advantageed investing or even other good investments (trick is figuring out what is and what isnt).

Note, that if the 401k has no company contribution you should instead go IRA in full (never do a noncontributive 401k unless the numbers show value – rarely do).

Also in light of potential company failures, never do a internal 401k type of plan.

Internal – think Enron .

External – I worked at American Electric Power and my 401k was Fidelity.com for the whole 8+ years I was there.

Reason, internal the company can steal your 401k $$, while externally once they send the contribution they are out of the new $$.

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11 Paul Creamer

Also anotther thing one can consider for investing in general (not necessarily ira/401k related) is DRIPPING.

One doesnt even a lot of $$ to do ‘drips.
Other than the intial start of shares, it can be free (other than shareprice) to drip.

Drips are where you buy a set amt of $$ each month of 1 or more stocks and always the same amt. Ie; Like I did, started with $50/mth to buy 2 stocks and now doing $500/mth to buy 6 stocks).

Example: buying $50 of GE whehter its the current $9/shr or $40-$80/share .
Reinvest of divends too.

You can do this direct with a company in many cases, but can use the following website to have it do it for you ($25 fee for members). But going direct can be virtually free but requires more initial shares.

I do it both ways, and I still use both EDWARDJONES and also sharebuilder too depends on what I need and whether I want to do instant buying.

Note that drips are also scheduled buys, in that u buy on a certain date every month, no matter what happens. I use sharebuilder often to buy normal extra shares when I get lucky enough to time the market.

money paper com was one research source.

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12 adam

Okay thanks for the advice. I need to start planning for the future and w/the economy the way it is I don’t know where to start. Any other tips anyone please let me know.

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13 Ryan

Adam: The best thing you can do is stat contributing to a 401(k) if you get an employer match, that way you aren’t leaving free money on the table. If you don’t know where to invest your money, start with a targeted retirement date fund, which will have an automatic asset allocation. Then start learning more about asset allocation and determine if that mix is good for you, or if you should change it.

Then look into other retirement accounts such as an IRA – Roth is usually considered better if you are eligible to make contributions, but you should look into both Roth IRAs and Traditional IRAs to determine which is the best for your needs.

If you will need money in a few years for a major purchase like a house or car, then consider starting a CD Ladder or putting your money into a high yield savings account. You don’t want to take too much risk with money that you will need soon.

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