how to explain to a hard headed 18 year old

[jIM_Ohio]

I used to be a strong advocate of 401(k)'s, but now I'm not so sure. I am a retiree who contributed regularly to this kind of plan while I was employed. But thanks to the meltdown, I've lost almost all the gains that I earned since I stopped working. (Fortunately, my principal is still intact) I'm still in the program and have redirected my balance from riskier investments into a fund with a "guaranteed interest rate" fund, which is supposedly safe but it's not FDIC insured. If and when bank IRA CD rates increase by another percentage point, I will transfer my funds there and get out of "securities" altogether.

Unless daughter's employer has a 401(k) plan that is matching and offers a bank CD plan as an investment option, I would advise her to open an IRA instead and stay away from 401(k)'s until the market stabilizes and is past the danger of a depression.

Anyone which follows this advice is a fool in my eyes. Anyone which agrees shares the same sentiment from me.

This is buy high sell low. Terrible recipe for success.

If a person is retired, they need to have an asset allocation geared for income (around 30-60 percent bonds). If a 40 percent loss is the only gains a person had, they did not have a lot to start with.

Most people will have 400 percent or 1000 percent gains in retirement portfolios. I contribute 20k per year for 30 years (600k), I expect around 4X that (2.4 M) in retirement. Losing 40 percent would hardly wipe out all the gains for someone which invested wisely their whole career.

A person could use an IRA and a 401k for the same investment. It's not the 401k which is the problem, it's how a person chose to invest the money.

401k is better because it has a 16,500 contribution limit, IRA is 5000.

[disneysteve]

I agree, Jim. If a retiree lost 40% of gains in the recent downturn, that suggests to me that the portfolio was much too aggressive for a retiree.

Waiting until the market goes back up before buying in makes no sense. Again, that's Buy High, Sell Low. Ironinc how people are willing to buy overpriced shares when the market is hot but aren't willing to buy those very same shares when they are on sale for 40% off. That would be like saying, "Oh, Best Buy has that computer I want on sale this week for $1,500 but I think I'll wait until next week to buy it when it is back to $2,500.

[Exile]

Anyone which follows this advice is a fool in my eyes. Anyone which agrees shares the same sentiment from me.

This is buy high sell low.

What planet are YOU on jIM-Ohio? (And BTW, disneysteve, I'm surprised at you too.) You may have not noticed but the American economy is in a whole new universe now. The concept of defined contributions (401(k)'s) for workers, which was questionable to begin with, instead of defined benefits (pensions) is now a disaster for millions who have contributed to these plans. What you're proposing is buy low and sell lower. The economy and market are not likely to improve for a LONG time to come, the best efforts of Obama notwithstanding. It's the 1930's all over again.

No matter how young a person is if (s)he starts investing now, (s)he will still lose his/ her shirt for many years before seeing the light of day, if ever. If you still believe in dollar cost averaging after all that's happened in the past several months, you're the biggest fool of all.

Just to see how worthless securities have become as an investment, take a look at the investment performance of plans in Mass Mutual(my 401(k group of funds). Most of them have lost over 40%--80% in value. Then tell me what a wonderful "opportunity" the stock market still is and will continue to be.

[jIM_Ohio]

What planet are YOU on jIM-Ohio? (And BTW, disneysteve, I'm surprised at you too.) You may have not noticed but the American economy is in a whole new universe now. The concept of defined contributions (401(k)'s) for workers, which was questionable to begin with, instead of defined benefits (pensions) is now a disaster for millions who have contributed to these plans. What you're proposing is buy low and sell lower. The economy and market are not likely to improve for a LONG time to come, the best efforts of Obama notwithstanding. It's the 1930's all over again.

No matter how young a person is if (s)he starts investing now, (s)he will still lose his/ her shirt for many years before seeing the light of day, if ever. If you still believe in dollar cost averaging after all that's happened in the past several months, you're the biggest fool of all.

Just to see how worthless securities have become as an investment, take a look at the investment performance of plans in Mass Mutual(my 401(k group of funds). Most of them have lost over 40%--80% in value. Then tell me what a wonderful "opportunity" the stock market still is and will continue to be.

I am on this planet, you apparently live in another world.

If a person has a 401k, my guess is they are still working and contributing- so losing 40 percent is par for the course. They do not need the money now, as they are working.

Above you suggested to use IRAs and not 401ks- its not like those are different. You neglect all tax deductions in your broad statement (401ks are bad) as well as the flexibility they provide over pensions (I can borrow from a 401k, I can retire early with a 401k, I can invest as aggressively as I want or as conservative as I want).

It's not that your advice was wrong, it's that your advice was bad and blatantly one sided.

This economy is no different than 2000-2002, 1991, 1987, 1970-1973 and similar with inflation, unemployment or a market crash. The stock market is only 1 indicator of things. I will profit from others panic, so feel free to keep spouting your funny view on things- its people like you which will let people like me make money.

[disneysteve]

Unless daughter's employer has a 401(k) plan that is matching and offers a bank CD plan as an investment option, I would advise her to open an IRA instead and stay away from 401(k)'s until the market stabilizes and is past the danger of a depression.

This is what I wasn't agreeing with. There is no fundamental difference between a 401k and an IRA. Neither one represents a specific investment but rather is simply a type of account. You could have a 401k and an IRA with each invested in the exact same things, so saying someone should avoid a 401k and use an IRA instead doesn't really have meaning. What matters is how the money in those accounts is invested and allocated. Of course, there are also tax and distribution issues that differ between them.

Also, you are sharing your 401k experience as a current retiree and using that experience to suggest what an 18-year-old worker should do today. Those are two very different life situations and they warrant very different investment advice.

I do agree with you that 401k plans are not the wonderful retirement solutions they were touted as. Traditional pensions were certainly far better for the average worker, but we can't control that. We've got to work with what we've got. So yes, I continue to believe that people, especially young people 30 or more years from retirement, should be contributing to employer-sponsored retirement plans and being aggressive with their allocations. None of us knows what the market will do or when it will recover, but I do believe it will recover and I don't believe in market timing. There have been numerous posts here and elsewhere from folks who are waiting for the market to stabilize or start going up again before they invest. I think, in most cases, that is not a good strategy.

[Investing First Steps]

I think many cases can be made for this being an unusual economic circumstance where you may not see "classic" stock market returns for some time to come however I'd make two important points:

1.) One of the reasons investing in a retirement account is often effective is because it works out to "forced" dollar cost averaging. We all know that and important part of the mechanism of dollar cost averaging is to make sure I buy more when prices are low and less when prices are high. So if you stop investing because the market has gone down, then you are essentially locking in the bad part and avoiding the good.

2.) One of the reasons the economy will be "bad" for the coming years is likely to be inflation. If there is rampant inflation for a period in the future, you will not be best served by having your money in cash. Stocks may not be the optimal hedge against inflation, but they are better than fixed return vehicles like CDs. Especially when ultra-low interest rates will be part of that inflationary force.

[cptacek]

The biggest problem is that some people think:
401(k) = Dow or S&P 500
and IRA = bank CD
instead of thinking of them as different tax buckets.