SOCIAL: money trouble!

[tlhinsf at sbcglobal.net]

Palak,

In spite of all I say below, your friend should check with the 401k 
company. I'm not a financial adviser, so take everything I say with caution.

However:

*Everyone's* 401(k) has "lost" about 13% because that's how depressed 
the markets are *right now*. The words in bold are important here.

I put /lost/ in quotations marks above because it may not be a real 
loss. It probably isn't a real loss. It's probably only a loss "on 
paper." *It will almost certainly become a real loss if he sells. Unless 
he is retirement age, he should hold onto the shares and in fact should 
probably BUY as many more as he can right now.Why? Because they are a 
bargain!* The current price is probably below fair value. Remember: the 
rule is buy low, sell high.*

If, however, he is retirement age then he should hope for one of the 
"Main Street" bailout proposals to get enacted which will put a 
temporary freeze on the MANDATORY withdrawals from 401ks that many 
retirees are facing. Forced to sell low. That sucks.*

The above assumes your friend's 401k plan has the money invested in 
mutual funds, which is most commonly the case. If he were in some sort 
of guaranteed growth sort of fund then he wouldn't have "lost" 13%. If 
he is in fact invested in mutual funds tell him *not to sell*. He hasn't 
actually lost any money. He *will actually lose money the moment he 
sells the shares*, because he'd be selling low. He'd be doing what is 
call "panic selling." Panic selling is one of the biggest forces driving 
stock prices low right now. So he'd become part of the bigger problem.

What has happened is that the trading price of the shares in the mutual 
fund that he owns have come down because the price of the individual 
stocks on which the mutual fund is based have come down. But if the 
companies whose stocks comprise that mutual fund still have intrinsic 
value (they still make stuff that people want and they are well managed) 
and if they stay in business through the recession, then the stock 
prices will come back up to fair value and so will the price per share 
of that mutual fund.

If your friend is not retirement age and he sells, he screws himself in 
multiple ways. First he's selling low, for less than what he bought the 
shares for. Second, a 401k is a tax deferred investment. You (and your 
employer) put money into them with deducted from your paycheck before 
computation of taxable income. You pay taxes when you cash in the 
shares. Third, early withdrawal penalties apply if he's not retirement age.

At the very least we are in a "hold" climate. Some (including Warren 
Buffett) believe we are in a "BUY" climate.

Todd

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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