Sunday, September 14, 2008

What should I do with my 401(k) during the financial crisis?

The headlines are not good right now, for example:

Major companies are failing (or at least, their futures are in question), for example:
  • Above mentioned Lehman Brothers is frantically looking for a buyer. The company's stock has fallen from a 52-week high near $70 to last Friday's close of $3.78 per share.
  • Washington Mutual has fallen from a 52-week high near $40 to Friday's close of $1.75 per share.
  • American International Group has fallen from a 52-week high near $70 to last Friday's close of $11.49.
  • The list goes on: Fannie Mae, Freddie Mac, Citigroup, Merrill Lynch and others

The fallout has been a decline in stock prices. My 401(k) is down 13% year to date, with the biggest percentage losses coming from the category of my international investments. My international fund is down 23% and my emerging markets fund is down 30%. The S&P 500 index fund which holds the bulk of my assets is down just about 13%. My best performer by far is the fixed income fund That's up 3.7 year to date. My account value is about $63,000, with a loss of approximately $9,000 year to date.

So I'm giving in. On Monday morning I plan to sell everything and put all of my money into the fixed income fund. The stock market is rigged in favor of the rich. I'm going to wait until we hit bottom and then put all of my money back into stocks.

Just kidding. If you've been paying any attention to my posts about my investment philosophy, I am fully prepared for years like the one we're currently having. If you want to put your money in stocks, you have to have the stomach to watch the value of your holdings drop 50% without batting an eyelash. The current market environment is nothing new. Between now and 30 years from now, I expect stocks to perform better than my alternatives: bonds, bank accounts, gold, cash, etc... They are not going to go up every year.

So what should you do? Besides rebalancing if your holdings have strayed 5 percentage points or more from your target allocation, I recommend doing absolutely nothing. Keep buying more stock at cheaper prices. When we have our next inevidable bull market, you'll be happy you did. More importantly, when you retire, you will have more money than you would if you put your money into bonds over the years.

Of course, if you have 5 years or less until retirement, the above does not apply. If you have a long time until retirement, however, rest easy.

I also think this is a great opportunity for active investors. Some great companies are getting battered by the headlines above. Mr. Market is running scared and doing foolish things. I personally don't have the time to study and make individual stock selections, but if you do, I'd imagine you can find some pretty attractive bargains in this market.

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