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My 401(k) Is Losing Money, What To Do?

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401K DyingMy 401(k) is hemorrhaging but I’m not freaking out. I’m not freaking out because I’m 28 and years away from retirement. However, several readers have emailed me recently asking me what they should do about their 401(k)’s and IRAs after recent events. Unfortunately, I told them to call up a financial adviser because I don’t really have a suitable answer. But this afternoon I spent some time thinking about it and wanted to give a more reasonable response. I tried to put myself in their shoes and say what I would do.

If you’re like me, about forty years away from retirement, the answer is that you should do nothing differently. Make your regular contributions, check your asset allocations, and do something else with your time. A lot can happen in forty years so you shouldn’t do anything rash like liquidate all of your assets. We had a recession in the 80′s, a mere twenty years ago, and since then we’ve seen the longest bull market period in a very long time. Trying to time the market is a fool’s errand and, honestly, your time is better spent enjoying life rather than fretting about your balance sheet.

If you’re slightly closer to retirement, say ten years away, now’s a good time to adjust where your new contributions are going and go towards a more conservative allocation. I wouldn’t liquidate your equity positions but any new money should go towards conservative investments that will lower the amount of volatility you’re exposed to. Check out the1-year chart of the CBOE Volatility Index, an index that tracks the 30-day volatility of the S&P 500 index using a variety of investment vehicles. Note the fact that since August, that index has been going insane. The enemy of a retirement in the near future is volatility. While I wouldn’t sell everything off, I would adjust my contributions to lower the volatility by going with safer investments.

If you’re a year or so away from retirement or in-retirement, hopefully your exposure to equities is limited. Either way, chances are your investment portfolio went down along with everything else. For retirees, I don’t know what the right answer is except that you might want to consider getting some supplemental income to buy more time until the market has an opportunity to somewhat correct itself. I would liquidate enough funds, from equity positions, to make it through the next three to five years and keep the rest as is. But remember, I’m 28, so I would take that advice with a very large grain of salt.

Do you have any better advice?

(Photo: silvaazniv)

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37 Responses to “My 401(k) Is Losing Money, What To Do?”

  1. Llama Money says:

    If you get out of your 401(k) now and into cash, you have a problem. For one, you’re buying high and selling low. If you are convinced the market is heading lower, you’re presented with another problem – when do you get back in? How do you know when the bottom has been reached? Even the experts don’t know… so how in the world could your average investor?

    I’m staying put… but like you, I’m young and can afford to. I definitely feel for folks who may not have that luxury.

  2. jay says:

    another facet to this mess is the people who lose jobs and have nothing to fall back on except for the 401k. If your scared about your job and seeing the value of your nest egg decline by vast amounts daily its hard to want to stay the course.

    A lot of people don’t just see the 401k as a retirement vehicle but also as a worst case scenario parachute.

  3. Al says:

    Your post was spot on! If you’ve got 10, 20, 30 years until you retire, put the pedal to the metal and invest in stocks, both U.S. and International. Your portfolio will go up and down but ultimately, will be up. Picture a man walking up a steep hill playing with a yo-yo. The yo-yo is your daily and monthly stock movements. The hill is time. Guess what? Your yo-yo fluctuates but you are always going up over time! When you are within 10 years of calling it quits, shift money into cash and bonds. When you retire, you should have a minimum of 5 years (and preferably 10 years) of what you need as annual income to buffer against any bear markets.

  4. Mike says:

    I tend to agree with Al.
    I’m 20 years away from retirement age and yes, my portfolio has taken a brutal beating this year. The exception are the REIT based funds which have taken a smaller hit compared to stock funds. Up until a couple of weeks ago, they were showing small gains for the year to date.

    I’m seriously considering making a larger contribution now due to the lower cost of shares in all of my funds. If I decide not to do that, I’m still confident that the current losses will rebound even higher. Regardless, I believe that those who are looking long term should consider buying now instead of selling. Who knows where and when the bottom will be reached but most, if not all, funds should be much higher than they are today.

    From personal experience during the dot com bust; draining a 401k for survival is (was) a mistake. Fortunately I’ve built that reserve back up and try not think of the portfolio value had I not felt forced to touch it eight years ago. Only do that as an absolute worst case scenario.

  5. JimmyDaGeek says:

    It is too late to do anything with money already invested in the market. By selling now, you will change a paper loss to a physical loss and your fear of loss will not let you get back into the market until prices have risen above the point when you sold. IOW, you will end up selling low and buying high.

    OTOH, what to do with new money? I have a 15-year horizon and am putting all my new money in a diversified portfolio of stock index funds. Search the Internet for “lazy investment portfolio” as they go by many names.

  6. MoneyLint says:

    I’ve found it very difficult to find any sort of advice on 401K tactics in an environment such as this and for my investment time horizon. I have over 30 years of investing before retirement and with all the volatility in the market, i have watched my 401K balance go down hundreds if not thousands of dollars a day. Yes, I know these are “paper” losses but you cannot deny the immediate loss of value to my 401K.

    So in an effort to stop the blood loss, I transferred my stock fund balances into a money market fund but I continue to make contributions into my stock funds. My thought process was that I would preserve the capital I have but continue to buy into my funds at ever-lowering prices with each pay period. I keep my eye on the market and am actually employed smack dab in the middle of it so I strongly believe this is just the start of this mess. When i see things start to settle down, I’ll plow the money in my money market into the stock funds again, which should then be trading at much lower prices, and then ride the appreciation up again.

    I know the pundits say don’t try to time the market blah blah but I think that advice is intended for people that know very little about investing and make irrational decisions with their money. My plan will require a watchful eye on the markets and I’m sure I won’t catch the bottom but I’m preserving capital now in anticipation of throwing that capital back into the market after this mess somewhat subsides. I’m not sitting out of the market forever. Just until the volatility and irrational behavior subsides.
    Cheers

  7. jim says:

    I was doing some research today and discovered that from the peak in 1929, prior to the Great Depression, it took twenty five years before the Dow returned to those same levels. Twenty five years… it’s a long time.

    I have twenty five years… it’s much harder for people with shorter time horizons.

  8. Mel says:

    Age is one part of it, but you also need to take into account your actual financial goals. Much of your money for 40 years from now can be in stocks, and that is true even for 50 year olds in good health who might live to be 90. However, if you are 28 and buying a car or house in the next few years, that money should be in cash.

  9. Jim: If you continue investing regularly, it doesn’t take 25 years to get back to even. The reason for this is that you’ll be accumulating additional shares while it’s down, and by the time your “old” money is even, the newer money will have generated a good bit of profit. Arguments that look solely at the values of the major indices without regard to additional investments are, in many cases, somewhat disingenuous.

  10. Chris says:

    I guess I’m lucky. I work for the US Gov’t and use the Thrift Savings Plan (TSP) which is their version of a 401K. I just moved my funds out of the high risk plans to a bond plan. Instead of losing 20% of my savings value the bond fund returns about 4%. I plan to move the money back into higher risk plans when the share prices bottom out.

  11. Well, you have a lots bigger problem if you’re a couple years from retirement and about to be laid off. Three or four days ago, I figured I could live on a drawdown from my investments plus the handful of peanuts Social Security is slated to fork over. I couldn’t live well, but I wouldn’t starve.

    Now we’re looking at starve. My money manager is brilliant, but no one is brilliant enough to have saved much of any assets in the present environment.

    “Get another job” is easier said than done with you’re long in the tooth and live in a culture whose bias is generally pro-youth and anti-age.

  12. Jeff Rose says:

    I think you all make good points. Being “diversified” is some times tough when you have limited options in your employer’s 401k plan. Typically, I suggest to consider a Roth IRA for a portion of your retirement savings to take advantage of the Tax Free Growth. But also having the Roth IRA will allow to utilize different investment strategies that are not offered in your 401k (the investment options are infinite. And for those of you that have 20 years + to retirement, hold on and enjoy the tax free ride.

  13. Chris: Let me know when share prices bottom out. Perhaps you know something that the rest of the world doesn’t, but I’m not sure how you’ll know that except by looking at the bottom in the rearview mirror.

  14. George Thomas says:

    I am 29 yrs old and have a 403b plan from work which I contribute to every pay period. I rolled over some money from my previous 401k and have been contributing towards my 403b for a year now.

    I don’t have much knowledge about investing and truth be told, I never took the initiative to learn more about it… and now I am paying for it. I allocated all my money and current contributions to a Vanguard Target Retirement 2045 fund. I have lost a significant amount of money from this fund and am absolutely clueless as to how to minimize the bleeding. Do I try and diversify amongst other funds that my plan offers? Put everything into a fixed fund? (I thought of transferring my money into a fixed rate fund — but I would then be selling my shares at such a low cost that my loss would too much for me to be comfortable with) I decided that I would keep contributing towards the 2045 fund, with the thought of buying up more shares at a lower cost and then letting “time” play it all out for me.

    Am I thinking correctly? Should I take the loss and put it all in a fixed rate fund right now? I am blaming my financial loss on my ignorance of not understanding investing, the market, better… I took the easy route and just put it all in a “self managing” target fund — which personally I thought would be the best thing for me. Now I will be more proactive — I just need some direction and advice…

    I welcome anyone’s feedback…
    Thanks for the time..

  15. Jeff Rose says:

    To George:

    Do not be upset with yourself. You made the best decison with the best information you had at the time. Hang on. You are not the only one out there. There are many good quality funds that are down between 30-40%. That does not make them bad investments, just hurt with the jaded mess that is our economy.

    Your logic behind to keep contributing to the 2045 fund is right on. You are buying cheap. So buy, buy, buy. But if you move what you currently have to a fixed account, when are you going to move it back? Most likely it will after the market has recovered and then you will be buying high. If you have faith in what you are buying now will grow, then have faith in what you already bought will come back.

    I am 30 years old and have seen my portfolio drop around 25%. It’s a tough pill to swallow, but I know I’m not retiring tomorrow, so it doesn’t matter. You would be amazed if you could look back and see how the market has recovered after bad strecthes just like the one we are going through.

    Do not cash out or moved to a fixed account-especially now. Stay in stocks, and make sure you have a diversified approach, not just the SP 500 fund. Have some international, emerging markets, etc.

    Does your 403b match? If not, you may consider a Roth IRA. Prior to me starting my own business, I utilized my previous employer’s 401k to get the match and then everything else went into the Roth IRA. Also, opening a Roth IRA would allow to use other investment options that are different than your 401k. Try setting one up with another mutual fund company other than Vanguard (not a big fan, but that’s for another day). That way you’re diversified even more.

    Good luck! Let me know if you have any other questions.

  16. matt says:

    George and Jeff, it’s interesting to read your comments. George, I’m 29 and have all of my money in a 403(b) that invests in a life-cycle fund (Fidelity Freedom 2040, which invests pretty aggressively). And, like you, I really know nothing about investing; that’s partially why I chose this fund. It seemed to take the guesswork out of investing.

    Now, my portfolio has dropped almost 30% and it scares me. I’m looking at other options (my dad suggests cashing some out and putting it into a 2.5 year CD at 4.05%). But, I don’t know what to do. I’ve got a long ways to retirement so I feel like I should just stay put. But I can’t help but fear the worst.

    matt

  17. andy says:

    I just reviewed my 401K and based on some back of the enevelope caluclations (which I wrote about) feel that it may not be a bad idea to reduce your 401K investments for now. Infact you can actually make money by cutting back on your 401K and putting that money in a high interest saving account. This assumes the stock market will fall further and I do advocate getting back in when the market stablizes.

  18. Gates VP says:

    Wow, so many great comments, but I’d like to point out a few:
    Jim: If you’re slightly closer to retirement, say ten years away, now’s a good time to adjust where your new contributions are going and go towards a more conservative allocation.

    I don’t know that you should be doing anything different. I think JimmyDaGeek really has it: It is too late to do anything with money already invested in the market.

    Let’s use George as an example. The Vanguard target fund is set for 2045. What this fund does is slowly move from high-risk to low-risk investments as you approach the target date. You are nearly forty years from that date and mostly invested in high-risk vehicles.

    You’re down 20%, so what? You didn’t take a high-risk investment and expect to make money every year, right? The whole “target retirement model” accounts for this type of thing happening. The fund is trying to get you the most money by 2045, not by tomorrow.

    To put this into perspective a bunch of guys with PhDs and mountains of data all sat around and figured out the most reasonable way to make you the most money by 2045. Part of that plan involves losing money on some years.

    Matt & George, by doing something other than continuing to pump money into the fund you are saying that you know significantly more than the guys who designed the fund. And maybe you do, lots of people probably do. But you both just lost 25-30% on your investments, so I don’t know that you really have a much better track record at this point.

    Instead, you should focus on the things that you do know. You know your job and you know the other places you can invest to make small gains today and in the coming year or two.

    You can sit around staring at the ticker wondering what to do, or you can do something today to start increasing you monthly cash flow and buffering your short- to mid-term savings.

  19. Scott says:

    What if I fear that I’m going to be laid off, and might need the money to survive until I find other employment? Should I move it all into my plan’s money market fund until I know what will happen with my job. I have been fearful of a layoff for a couple of weeks, and even after the penalty, I will be ok for awhile. I’m not so sure if the market keeps falling.

  20. George Thomas says:

    Thanks for everyone’s responses — I definitely took away some constructive feedback. Now I just need to act smart. Yesterday alone the the value of my Vanguard 2045 fund dropped $1700.

    As a few suggested: I am looking into other fund options to diversify my 403b contributions, and to start buying shares in some of these “better” funds at the now lower prices.

    I found out that my plan offers shares within the follwowing categories:

    International Funds
    - Julius Baer/Causeway International Funds

    Specialty
    - Cohen&Steers/Morgan Stanley Global REITs

    Small Cap Funds
    - Royce Opportunity Instl (ROFIX)
    - Royce Opportunity (RYPNX)

    Large Cap Funds
    - Dodge & Cox Stock Fund (DODGX)
    - Harbor/Rainier Growth Fund
    - Vanguard Institutional Index Fund (VINIX)

    Balanced
    - Vanguard Wellington – Admiral (VWENX)

    Bond
    - Vanguard Total Bond Market Index – Inst (VBTIX)

    I’m reading up on each, and am planning to re-allocate my contribution to buy less of 2045 fund and more of those mentioned above. If anyone has feedback on the funds mentioned above, pls. provide as it will assist me along with my own reading. Thanks in advance.

  21. Anonymous says:

    75 years old…………… on Sept 26th I BAILED OUT OF THE MARET AND HAVE $400 k IN FDIC IRA’s……….

    If my back goes under, Morgan Stanley and yes there is a valid question if it will……………?? How do I get my hands on my IRA accounts?

    thanks…………….. Tom

  22. Gates VP says:

    Hey @Scott: What if I fear that I’m going to be laid off, and might need the money to survive until I find other employment?

    That’s a valid fear, but the purpose of a 401k is not to buffer against short-term unemployment. For this, you should have a so-called “emergency fund” or “emergency living expenses”. The typical suggestion is to maintain 3 to 9 months of base living expenses in an interest-bearing, easily accessible account.

    If you’ve been pumping up your 401k but don’t have a sufficient “emergency fund”, it may be time to reallocate your savings mix.

  23. Jeff Rose says:

    Tom (anonymous)-

    If I think I am understanding your question correctly, you are asking about what happens if Morgan Stanley fails, how do you redeem your monies?

    First thing to consider is the FDIC limits. (please refer to fdic.gov). Although, the FDIC just increased their coverage, for IRA accounts it is still $250,000 per owner per IRA. In your case, with the information I have, you have currently $150k without coverage. Now, I am aware that many of the large investment firms have a way of having a network of banks that will get you more coverage, so you may be in the clear. You would have to do some further inquiry to verify.

    If your CD’s were to fail, the FDIC will step in and make you whole. It is a bit of an inconvenience, but with a litlle patience, you will receive your money back in full. Hope that helps!

  24. robert says:

    The truth is we dont know how far down the stocks will go down because we dont know how much they are really worth. The dow went up by 4x in 10 years. That is a lot. The chances that the stocks were never really worth that much to begin with and I am afraid the 401k phenom is only helping to drive up the cost of already over priced stocks. Many of the companies that we are investing in through are mutual funds have not made money in decades (like GM) and are only living off the assets that our grandfathers built for them. These companies work by canabalizing themselves and it is only a matter of time before they go belly up with or without the help of the government. At that point those that have stock will get nothing. As a country we dont make anything. Everything is imported. I wonder if we know how to make anything anymore. Before anyone continues to throw $200 a month of their hard earned money to these self mutilating companies something needs to be done to fix the problem.

  25. JimmyDaGeek says:

    It gets very scary to read a panicky post like the one from Robert who apparently has no clue on how to evaluate stocks and makes a series of exaggerated absolutist statements that have no basis in fact. For example, a simple Internet search shows the Dow Jones Industrial index to be in the 8000 range in 1998, meaning the Dow did not even double once in 10 years, let alone twice. Unfortunately, that also means we haven’t gotten very far in 10 years. So much for rollng 10-year averages ;)


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