Our 401K and IRAs Are Losing Money – Do We Throw Good Money After Bad?
One of the things my spouse and I have been doing to try and get our whole financial situation on the right track is invest for retirement. We are both in our mid-thirties, so retirement is still 30+ years out. I have an IRA I started in grad school and last year moved to Vanguard, and my spouse has a 401K plan at work that he gets 20% of every dollar matched for the first 6% of his salary. Just a few months ago, when my spouse got a raise, we changed the 401K contribution to 6% vs the 4% it was already at to take advantage of the full match.
We haven’t been investing in my IRA, because our priority was to finish getting out of non-mortgage debt first. So I know exactly how much was initially invested when I moved the IRA last year. And logging onto my Vanguard account this morning, I can see that in a year’s time, the IRA has lost 33% of its value (most of that recently). We’re in a Target Retirement fund which, because of the long investing horizon, is about 90% in stocks. And stocks right now, well, stink. Yippee.
I’m not exactly worried, but I am trying to figure out what the short term investing plan should be. I haven’t looked at my spouse’s 401K yet, but I know that it is also heavier on the stocks side so I am sure it is not doing so well. Do we keep the investing at 6% of his salary in the 401K, and watch things go south for a while? I of course, like everyone else, have no idea when the market will turn around. I don’t want to try and time the market but at the same time it is hard to put money into something you are almost certain will lose value immediately. I want to think to myself “stocks on sale!” but I’m not doing so well with that. No timing the market! Stay the course and ride things out! Maybe if I say it enough times I will start to let go of my jitters and believe it…If we were closer to retirement, we’d have more conservative allocations of our investments. So things wouldn’t look so bad. We’re reasonably young. There is still time. (I will now say this 5 times before bed every night. 
)
I also had plans to open a 529 for each of my kids in September. They are young (4 and almost 2) and there are many years until they go to college. But I’ve lost my nerve and the money still sits in their ING savings accounts. Maybe I can work myself up to it by the end of the year.
October 8th, 2008 at 4:05 pm
Whatever you do, don’t sell. The best time to get into the market is when the prices are low. Since you have such a long horizon before you need the money (30+ years), stay the course, and invest as much as you can spare on an ongoing basis. Some of the best bargains are available right now.
October 8th, 2008 at 4:13 pm
The thing that makes me nervous is this. If you invested in the S&P 500 index 5 years ago, you will have seen a -4.05% return over the course of 5 years. If you invested in the S&P 500 index 10 years ago, you will have seen a -1.44% on that money over the course of 10 years. Yes, you will have less money in your account than you did 10 years ago!
I understand that traditionally over the course of 30 years, you will have good returns, but you cannot really just ignore all financial news and expect to be insulated. There were so many warnings of the big falls that were to be expected, and if you had divested from the S&P 500 one month ago, you would have seen a 26.45% return over the 9 years and 11 months period. I know you cannot time the market perfectly, and you will be okay by being able to ride out the storm on money that is already invested, but is it really smart to not at all pay attention to the market when making contributions and allocations?
Since the match is only 20% of each dollar (sucky match imho, bad company!), then your break-even point is if the stock portfolio loses 20%. Thus, I would say that you should not stop or cut investing unless you feel that the portfolio will lose more than that. Even if you do think it will lose more, since you are in it for the long-haul it might be a good idea to still stay in because I am sure it will jump back up to at least even money eventually which will allow you to reap the 20% benefit on that cash.
That being said, I would be tentative about investing in your IRA or 529 right now with no bonuses. Personally, I do not think we have hit the bottom yet, and you are likely to lose a good bit more. My suggestion would be to wait until after the election and let some of the volatility shake out. I mean, you could get some big rewards by acting before then, but the risk is such that you might immediately lose capital that could be better invested now in an ING account.I know from things that I have read before that you are pretty risk adverse. Also, remember you still have over six months in this tax year to make 2008 contributions to both plans.
October 8th, 2008 at 4:21 pm
Actually, now that I think about it, if it loses 16.67% you are at the break-even point because you are investing more than 100% of your money. (16.67% of $1.20 = $.20)
Anyway, fortunately I get a 100% match on the first 6% in addition to the tax breaks so my portfolio would have to lose 50% to hit the break-even point.
October 8th, 2008 at 4:51 pm
@Brian – we’re not going crazy and pulling money out. just pondering the future.
@Brandon – I am pretty risk-averse. The thing that stinks to me about investing is it seems like you are cursing yourself to never being able to retire if you don’t invest, unless you save a lot more than we can possibly afford to. Yikes. But your numbers, well… um… so I can never retire even with investing
the 20% of every dollar match is sucky, I agree, but my spouse’s company does make up for it in many other non-sucky ways. But the match and cost of health insurance… sucky.
October 8th, 2008 at 4:53 pm
If the volatility makes you a little sick, invest in relatively ‘safer’ options. If you have a bond fund option (my 401k one is up slightly on the year, my IRA one is down slightly in the 6 months I’ve had it). Bonds might be pretty scary too right now, but less so. If a company goes bankrupt, stockholders are wiped out and bondholders will at least get a cut.
Or a simple money market type account (even if it breaks the buck it won’t lose more than 4%) should pay 3 to 5%.
If the volatility makes you sick, contribute in other funds! You might miss part of the upside, but its not worth being scared.
October 8th, 2008 at 5:18 pm
I will continue my IRA contribution, but is thinking of saving the money up first and make one or two bigger contribution at the end of the year rather than every paycheck, because I think the market is still going to go down (or at least, stay down) for a while. That way I can make some interest in the meantime, and perhaps fish for some even cheaper mutual fund shares to buy at that time.
October 8th, 2008 at 7:17 pm
Keep investing!
Thanks to the current market drop, your 6% will buy more shares of whatever funds you’re buying. So, when the market recovers you will make more in the end. Also, due to dollar-cost-averaging, you will get the best price-per-share over time by buying smaller numbers of shares consistently rather than buying a large number of shares at once.
October 8th, 2008 at 7:37 pm
DH and I had a similar discussion: basically should we continue with our current investment plan or switch to more secure investments such as Gov bonds. We can’t stop the amount invested because with our TSP you only can change the amount contributed once a year, during open season. I’m currently leaning towards letting it ride, under the premise that we’re buying low and unless these funds go under (not likely) ultimately we’ll come out ahead. We do have to trust that fund managers are on top of individual stocks within the portfolios! That, of course, is why I only “dabble” in individual stocks.
We have one, and he did a superb job of balancing our investments, so that we’re fairly protected even now. He even made recommendations on how our TSP should be allocated, and again superb advice. We found him through the person who does our taxes, so we knew he was solid.
Vanguard is GREAT. so smart choice.
We are NOT adding extras to most investments at this point, though if we were debt free I would, even now.
If you don’t have an investment counselor, this might be an interesting time to talk to one. They’d probably be cheap
Anyway, sorry, doubt if any of this helps you right now
I’d say don’t freak, don’t sell, and stand securely at the sidelines; basically I would agree with Brandon and wait a few months. Even Jim Cramer is suggesting folks step back and take a breather.
October 8th, 2008 at 7:55 pm
I’m in the “hold em” camp but Kiran makes a great point. You say you are 90% invested in equities which is a pretty aggressive stance. I wouldn’t necessarily make changes right now but maybe over time you could go more conservative if that suits you.
You can just pick a life cycle fund that has an earlier “retirement” date.
October 8th, 2008 at 8:51 pm
Buying stocks right now is like getting them on sale!!! I’m sad my retirement has lost so much, but excited when I see I’m getting so many more shares for each investment.
October 8th, 2008 at 9:24 pm
I would definitely keep contributing the 6%. I’m fortunate that my company matches 100% of the first 5% I contribute, so I’ve always made sure to contribute at least that much. I’ve been contributing to my 401k for 9 years, and I’m actually below my total cost basis (including company match). It’s somewhat sickening, but like you, I’m a good 30 years away from retiring. However, if I take into account only what I’ve contributed, I’m still ahead of the game, so the company match has made a big difference.
October 8th, 2008 at 10:25 pm
Don’t think of it in terms of the money invested, but rather in how many shares you own.
I love looking at my monthly statements and seeing that for the same money invested, the number of shares I purchase going up.
Contribute away! You’re doing the right thing.
October 8th, 2008 at 10:51 pm
I’m with some of you other commentors. Seems like you may want to put some of your new money in something slightly different, in order to balance out some. And make sure that your equities are balanced out too – between large cap, small cap, intl etc…
October 9th, 2008 at 7:32 am
There are some 529 plans that are NOT linked to the stock market, but instead guarantee to match the rate of college tuition inflation. My parents used the Pennsylvania TAP program, now housed by Vanguard.
How it works: Each dollar you contribute to the TAP program buys part of a college “credit.” Let’s say that a credit is $10, so $50 buys five credits. (just an example…) If the state board of education raises its state school tuition rates by 5%, your credits are now each worth $10.50 – a 5% increase. Your $50 is worth $52.50. You are essentially paying for your child’s college education now, locking in the current tuition prices. You buy each college credit at “today’s” price, and they honor that credit for its full value when your child reaches college age.
Yes, you might make more money in the stock market. But I started school during a down market, and it was very reassuring to know that my money will never lose value and always keep pace with college prices.
October 9th, 2008 at 10:42 am
I have a SEP-IRA worth $87,000 from a $115,000 (20,000 in cash, the rest are invested in mutual funds-large-cap Franklin Templeton). Do you think it’s best to liquidate the 67,000 to buy real estate (office) for my own use (I’ve been looking for one) as a down payment to avoid the penalty? Thank you for any advice.
October 9th, 2008 at 1:55 pm
I’m 32 and I’m not worried at all since I know I have another few decades until retirement. I have been 90% equities in my 403b and I will continue to be 90% equities for quite some time. I only wish I could contribute even more right now.
October 9th, 2008 at 4:19 pm
As the other posters talked about, you are buying a product that will go up, just be patient! I also have the vanguard target retirement in a ROTH. One thing regarding your children’s education: make sure you fully fund your ROTH each year before you do your children’s education. That’s compounding money you can’t get back! I would go with the ING for college, I just am not willing to risk college money to the stock market – and what if your kids decide not to do college?
January 23rd, 2009 at 8:44 pm
I know this is an older subject by now but I just had to add my piece. Keep investing. I know it’s hard to put money in and watch it sink, but think about this: if the US market doesn’t come back, you have a lot more to worry about than your retirement. If in 30 years time our economy cannot recover, you won’t have to worry yourself over retirement because you won’t have one. I have faith that our economy can weather this storm as it has weathered every other recession in the last few decades and come back. For the very risk averse, allocating your funds over a wider and safer array of options may make you feel better. Of course, this is just my personal opinion as a frugal person and finance major.