My 401k is driving me *crazy* !!! (1 Viewer)

[Ted Lee]

so last quarter i lost about 4k. i figured i'd better re-asses my allocations.

i had one high-risk fund that took about 35% of my cut. i reduced that down to 10% plus i made some other changes so that my portfolio wasn't quite as risky.

i also dropped my salary deduction from 15% down to 10%.

so, guess what happened?

like you can't guess....

that high-risk fund returned a 15% profit!

man, i just can't win.

oh well, at least i didn't lose money this round either.

okay, thanks for letting me vent!

 

[Khoa Tran]

who said we let you vent? you just did it, next time ask!

 

[MikeAlletto]

You shouldn't be poking around in your 401k anyways...just keep the money dumping into it and 'let it ride'.

 

[Drew Bethel]

Why are you so worried about your 401k? It's a looooong term investment. Are you close to retirement or something.

 

[BrianW]

You bought high and sold low. You're supposed to do the opposite.

But I guess you knew that.

Still, that didn't stop you from panicking. Since it is a long-term investment that you put money into monthly, you should see these down times as an opportunity to buy low. Instead of decreasing your contributions during a downturn in the market, you should be increasing them to the maximum you can afford (or are allowed by law, which ever comes first). That way, when the market picks up, you'll have the benefit of having been able to buy more shares at a cheaper price right now.

You do know what dollar-cost-averaging is, don't you?

 

[Philip_G]

man I'm cheap, I invest my 401k in very very low risk options

 

[Ted Lee]

brian -

yup! i definitely panicked!

You do know what dollar-cost-averaging is, don't you?

uh...something about being able to buy more shares at a lower price???? :b

 

[Charles J P]

dollar cost averaging is basically what the average cost of a share of X is if you bought the shares at different times. The natural reaction if a stock goes down, is to do nothing, sell it, etc, but what you should actually do is buy more. Say you buy 10 shares of X at $20 a share. If the next week it goes down to $10 a share (the key is you have to know it will eventually go back up, but this is a pretty safe bet with long term investments like 401Ks), you could do nothing and hope it goes back up, or you could buy more (which in theory would actually help it go back up). As you buy more, the average cost per share goes down. So if you buy none, your average is still $20 per share. If you buy 10 more shares, your average cost is now only $15 per share (10 shares at 20 = $200 and 10 shares at 10 = $100... $200+$100 =$300 / 20 shares = $15 per share), which means the stock doesnt have to go back as far for you to break even.

I hope I didnt over simplify, I dont intend to insult anyone, but some people arent as good with math and need to be able to visualize things.

 

[Brian Perry]

One thing to keep in mind about dollar cost averaging: it works only if the market goes up over the long term (or whatever your investment horizon is). If the market is net down for the next twenty years, dollar cost averaging will kill you. Personally, I have gotten my ass kicked by dollar cost averaging shares of JDS Uniphase, starting when it was over $100 (now it is $2). Had I been dollar cost averaging on the sell side, I'd be rich.

While historically the market has been up, there are some schools of thought that suggest that with the baby boomers getting ready to take money out of the market, the next couple of decades could see a net decrease in the stock market.

It is a very tough time to be an investor these days.

 

[Todd Hochard]

While historically the market has been up, there are some schools of thought that suggest that with the baby boomers getting ready to take money out of the market, the next couple of decades could see a net decrease in the stock market.

I'm beginning to worry more about this myself. After all, productivity can only increase so far, given that the total number of available workers is expected to slow dramatically over the next twenty years.

Compound that with the fact that more Gen X-er's (such as myself) appear to be learning lessons in over-consumption from Baby Boomers, and are slowing their pace accordingly. With that, of course, goes the economy. Or, maybe that's just my decidedly small sample of the situation.

I'm still invested 100% long in stocks, though. I don't want to be against an unprecedented bear market right now. With interest rates as low as they are, I sure don't want to be in bonds, though. Don't take my advice, though- sometimes, when I look at my portfolio, I think I may well be the world's worst investor. I have a knack for stinkers.

Todd

 

[Ted Lee]

I hope I didnt over simplify, I dont intend to insult anyone, but some people arent as good with math and need to be able to visualize things.

i fit that mold perfectly. that was a great explanation.

i've read a few articles and it seems the general consensus is that the bear market is over? figures...i finally have some extra money to invest and i get skunked!

oh well, i bumped my 401k back up to 15% (which is the max i can do) and i'm going to make a couple of other minor changes.

then, i swear (yeah...right) that i'll leave the damn thing alone!

thx guys!

 

[Drew Bethel]

Remember, the bigger the bull, the bigger the bear. I think the stock market won't hit 10,000 again until 2010 or so.

 

[BrianW]

Ted, I’m sorry if my comments made you feel bad. You started this thread in a light-hearted vein, so I thought I went with it. In retrospect, my comments look harsh.

I don’t know anybody who has learned their investing lessons the easy way. I learned an expensive lesson in the futures markets once, and the killer is that I knew exactly what I should have done. But I went with my gut instead and lost a lot of money. With a lot at stake, it’s very difficult to keep emotions from wreaking havoc with your logic. One good thing that came out of it, though, is that the Dow index can go down 3000 points, and it won’t make me bat an eye.

More recently, I was unemployed and unable to contribute to a retirement plan all of last year. The Dow went down below 7400, and I COULDN’T BUY!! Only this month have I been able to begin contributing to a retirement plan, and my first contribution went in when the Dow was almost 9000. Dang! I missed a golden year to be socking my money away. Not that I would wish anyone here to lose on their investments, but now that I’m able to begin contributing again, I think I’m actually happier when I see the stock market go down.

What everybody here has said about dollar-cost-averaging is true, the good and the bad. But the thing to remember is that you’re buying stock with a fixed amount of money each month instead of buying a fixed number of stocks each month. That way you get more stocks when they get cheaper.

Here’s something I wrote in another thread some time ago. It’s more relevant in this thread. It’s just another example of the power (though exaggerated) of dollar-cost-averaging:

Let’s say that you have just begun contributing $100 per month into a high-risk fund. Although its past performance looks pretty good, you’ve kept your contribution to $100 per month to limit your losses.

The first month you contribute, the fund’s shares are worth $100. (We may as well keep the math simple, eh?) The day after your first contribution, the share price drops to $1, losing 99% of its value! You consider getting out, but what’s the point? All you have left in the fund is a dollar! Besides, everyone on the HTF still claims that you should stick with it for the long term.

The second month you contribute, the fund’s share price hasn’t moved and is still at a measly $1 price point.

The third month you contribute, the fund’s share price has moved up another measly dollar, to $2. This is still 98% below what the share price was when you started out! You can’t stand it any more. You conclude that everyone on the HTF had to have been wrong, and you decide to take what little money you have left out of this dismal fund. You’d be happy now just to break even, but you simply can’t wait for the fund’s stock price to skyrocket to the price at which you would eventually break even.

Or can you?

Let’s assume that the fund price continues to go up just a dollar a month for the next 98 months, back to the original $100 share price. If you continue to contribute $100 to the fund every month, how long would it take for you to break even?

I think you’ll be surprised at the answer. (Work it out before you peek!)

Answer:
At just $2 a share, you already have broken even!
So far, you’ve contributed $300 into the fund.
In month 1, you purchased 1 share at $100.
In month 2, you purchased 100 shares at $1.
In month 3, you purchased 50 shares at $2.
This give you 151 shares, worth $2 apiece, making your fund worth $302. This is $2 above the break-even point of your original $300 contribution.

----------------------------------------------

Now that I've redeemed myself by saying something constructive, I think I'll go eat some Earth food.

 

[Ted Lee]

hi brian -

absolutley no worries my friend. no offense was taken!

i appreciate you taking the time to help me try to learn this stuff.

that was a great example. tbh, i *never* would have figured that out. that should tell you about my financial skills.

all i can hope for is that these fund managers have a little bit more of a clue than me!

again, thx for your time!

ted

 

[Danny R]

The natural reaction if a stock goes down, is to do nothing, sell it, etc, but what you should actually do is buy more.

This of course has a HUGE asterisk attached. Buy more if the company is fundamentally sound and not over valued in the first place.

There are plenty of examples of stock which have plummeted and kept on plummeting on to worthlessness. Likewise you shouldn't buy a stock that is fundamentally over valued either. Just because a stock is slowly decreasing doesn't mean you should keep buying into it if its intrinsic value is still much lower. Sometimes you definitely need to wait. I know plenty of people who bought all the way down off the tech bubble. The money spent could have bought triple the shares if they had only waited for things to stabilize.

 

[BrianW]

Danny, you're right. But to be fair, I think most of us are talking about the stock market in general, not about any individual stock. (At least, I HOPE that's what we're talking about. ). Even in my example above, I used a fund, and not a single company's stock. Certainly, if an individual company's shares plummet 99% in value, then it's a rare exception if the company survives at all.

I invest in funds so I don't have to worry much at all about your asterisk, but anyone who invests in individual stocks should definitely heed your warning.

[Edited to fix my eek.]

 

[Charles J P]

Danny, my huge asterisk was the statement that "the key is you have to know it will eventually go back up, but this is a pretty safe bet with long term investments like 401Ks" Obviously the opposite can happen, like Brian Perry described.

 

[Max Knight]

Yeah, I've been riding out the bear keeping my 401K in the S&P500. I'm not touching this money for at least 40 years, so I figure it's a good bet for now.

Every time the market drops, I just keep telling myself that I'm buying more shares. It was really depressing for a while, but last quarter I made up half my losses over the year! Given I'm still down a bit, but not nearly the amount I was 3 months ago. I have faith that the market will come back eventually. It may not be in 2003, but it will happen.

 

[DaveF]

It is a very tough time to be an investor these days.

Or it's a pretty good time because stocks are finally "on sale"... (with the caveats expressed by others, earlier).

I started investing in '97, and have ridden the bubble up and down (charting my IRA share price shows this wonderful hill...). Last year I lost several thousand dollars from my IRA as well, and my 401k is also not really gaining, despite company matching.

But I'm fairly young and have a few decades before retirement. I figure that eventually the stock market will recover and I'm getting stuff on the cheap right now. And if the stock market never recovers, then there are to be even bigger problems nationally, and I'd be screwed no matter what I did with my money