SOCIAL: money trouble!

[Brian Rice]

A 401(k) account is a tool for saving for retirement.  For most of the  
people on this mailing list, retirement is 20+ years away.  Therefore,  
too much worrying about the present value of a 401(k) portfolio is  
just a way to drive yourself crazy.  And I'm not just talking about an  
emotional thing: if you make a habit of selling stocks when the news  
is bad, you will lose amazing amounts of money over your lifetime,  
because in effect you will have adopted a strategy of "buy high, sell  
low."

As Mike noted, unless your 401(k) is administered in an unusual way,  
you can change the allocation of investments within the account  
without cashing it out.  You can move money from speculative stocks  
(like biotech or software companies) to "conservative companies" (like  
banks, ha ha ha!), or you can move money from stocks to bonds, and you  
can even move money to cash, which is not unlike a savings account.   
Doing any of those would be better than cashing out and paying the  
penalty.

However, be aware that a savings account is not a "safe investment"  
either.  I am not talking about the risk of banks collapsing; I'm  
talking about a risk inherent in cash itself.  Placing money in a  
savings account or money-market fund that pays, say, 2% a year is  
equivalent to betting that inflation will not exceed 2%.  If in fact  
inflation is 3% while you have your money in there, that means you  
effectively lost 1% on that investment, even though the number of  
dollars in your account is greater.  The purchasing power of that heap  
of money went down, and purchasing stuff is all money is good for.

If you put your money under your mattress, you are betting that  
inflation will not exceed 0%.

To put this another way: every investment, even the mattress option,  
is a risk.  The potential reward of any investment is directly related  
to the risk inherent in it.  The longer your investment horizon, the  
more risks it makes sense to take.  This is why financial planners  
tell people in their 20s and 30s to put their retirement savings into  
stocks, and to make regular investments even when the stock market is  
down.  If you're making regular investments, such as through 401(k)  
payroll deductions, you can think of the current market environment as  
a big sale!  Your dollars per month buy a lot more shares than they  
did three months ago.  The only reason not to buy those stocks is if  
you don't think they'll be worth more in 2035 or so.

Brian

On Oct 20, 2008, at 10:08 AM, palak joshi wrote:

> dear social,
> so a friend of mine had about 13,000$ in his 401k plan. He got a  
> letter yesterday saying he is on -12.8% and has lost about 3000$. He  
> kind of lost 2000$ in one week. This way he will lose all his money.  
> He cannot NOT INVEST his money in an 401K right? Can anyone tell me  
> if its wise to take the money out, pay the penalty in taxes and put  
> it in a safe savings account? I guess people who have more money can  
> wait for the economy to get better but with small amounts its not  
> worth taking the risk right?
> thank you.
> palak.
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