Before I begin, I just want to point out the title of this post rhymed. Don’t worry, I won’t quit my day job. Anyway, enough of the small talk and on to some big talk.
Most of you for at least the last six months have been scratching your heads when you receive your brokerage account, 401(k), 403(b), etc. statements. Many of you are noticing that all the gains (unrealized gains) you had made over the previous 2-3 years have evaporated, or maybe you haven’t. During the housing run up, everyone was feeling good about how well their retirement plan was performing. Some of you probably even increased the amount of money taken out of your paycheck when the market was rocking and your account was blowing up (in a good way). Then, when things started to unravel, most folks do at least one of these three mistakes.
First, you think about switching your investments, but decide to wait, because you believe the mutual funds you have chosen have just hit a bump in the road. Then, when the market has gone down too far for you to handle, you decide to move your investments at a far greater loss than when you initially thought about moving them.
Second, you decide to reduce or even stop your paycheck deferments, because you feel like you are throwing money away and will bring your deferments back to normal levels once the market recovers and your funds start to perform well again.
Third, you move your entire portfolio and future deferments into a money market or stable value fund, because it is safe and you have decided the investing in anything riskier than that is just gambling with money.
If you are part of the 90% of people who have done one of these three things in response to the market, you didn’t make the wrong choice (remember, there are no rights and wrongs in investing), you made the less ideal choice. Of course there are exceptions for choice #3, since if you are close to retirement (less than 5 years away), then you should have moved your money to safer waters. The problem with that is you should have had your investments in something safer to begin with being that close to retirement, unless you are going to be collecting a pension and do not foresee needing to access your retirement account immediately upon retiring.
So, what is the right or more appropriately, what is the “appropriate” answer? Now, let me remind you this is strictly my opinion and is only for folks who are long term (15+ years) until they retire. Remember this phrase, “Stay the course”. What this means, when referencing investing, is to understand that the market goes up and it goes down and sometimes stays at relatively the same levels for a period of time. When you start moving your investments around, which is what most do when the market is down, then you are attempting to time the market. If the market was rational, this would be a fairly easy thing to do, but often time the market reacts or actually overreacts to certain types of news. The internet has made news available virtually the second it is obtained. By the time you are reading the latest news on a company, the market has already made an adjustment. New news is in fact old news by the time you read it. The other problem is that sometimes the market reacts in the opposite direction of what rationale would dictate. Most of the time, people will buy more when the market it performing well, which leads to overpaying for a stock and will sell when the market is performing poorly, which leads to selling when the price is well below its intrinsic value. Get your head out of your ass and eliminate the impulse to do the wrong thing. The idea is to exercise the dollar-cost average strategy. The idea is that you invest the same amount into the same funds each pay period. That way, you’ll mitigate the risk by not trying to time the market. During extended bear markets, you may even try to increase your investment, thereby purchasing shares of a stock or mutual fund at a lower price, which will get you more shares for your dollar and reduce the overall average cost per share.
If stocks are not for you, then what should you invest in? Remember that savings accounts are suitable for short term savings. Over the long term, their rates of return are lower than the consumer price index (inflation rate). This will create losses due to a reduction in purchase power. There are a couple of things you can invest in other than stocks or stock mutual funds.
First, you can invest in bonds. There are several different types of bonds, treasury bonds, savings bonds, municipal bonds etc. or even bond funds. Bond funds are typically available for any company 401(k) plan. Bonds are considered safer than stocks, but are not guaranteed investments. They can go down in value and their rates of return typically trail stocks over the long term.
Second, you can invest in a money market account. The interest rates on money market accounts vary according to how the market is performing and also to interest rates. If interest rates fall, the rates of return on the money market account will fall as well.
Lastly, you can invest your money in bank products. This includes, CD's, savings accounts and even money market accounts that have a fixed, yet variable rate. They adjust the rate on a weekly, monthly or quarterly basis, depending on who where you are investing. Many are now coming up with on-line savings accounts. The rates now are typically 2.5%-3%, however, they have been as high as 5.25%. Once the Fed starts raising the rate, you'll see these rates start to climb. The only draw back to bank products, is that you have to pay taxes on the interest each year, as long as it is more than $10. It can be a great way to park your money until the crap storm blows over. The crap storm will last another 10-12 months. If you are emotional about your money, park in the banks. If you are a nut job like me, then keep increasing your contributions to your 401(k) and max it out if you can. Try not to pay too much attention to the garbage that is going on. The internet is a great place to get information, but it causes as much damage as it prevents. Peace and I'm out!!
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