ok, convince me 401 K is still smart choice

[Snodog]

Now, however, I am back in a job that does offer this and I feel the economy is more stable though not better...

Therein lies the problem. If you only invest when it feels safe you will be buying high and selling low. I'm sure it felt safe to invest in early 2007 as the market was flying high but the economy was secretly rotting away. The best time to invest was from Nov 2008-March 2009 when there was blood on the street and everyone was saying the sky was falling.

Even most of the profesional fund managers can't even beat the index's. If they do this for a full time job and don't know when to get in and out then I surely don't know.

My best advice: Pick a diversified allocation you can live with (apparently yours was to aggressive) and periodically rebalance into said allocation.

[disneysteve]

So wait, is your question about the 401k account itself? Or about investing in the stock market?

Aren't they pretty much one and the same? I mean true I am not picking the stocks to buy but the company that manages the 401K is. So no matter how you look at it, isn't it still the stock market?

No, it isn't.

A 401k is just a type of account. Same for a Roth or traditional IRA. They are just designations given to certain accounts that explain how the account gets funded and handled for tax purposes. Think of them as empty baskets.

What you put into those baskets is entirely up to you (within certain limits).

You could start contributing to your company's 401k program but choose to put all of your money into a fixed-income account like a money market, probably earning 0.5% or less right now. You could put your money 100% into a bond fund. You could put it 100% into a stock fund. Or you could put it in some combination of all of those. Your 401k may even offer some more specialized choices like a commodities fund, a real estate investment trust fund, etc.

So no, a 401k and the stock market are not one and the same.

[jpg7n16]

Aren't they pretty much one and the same? I mean true I am not picking the stocks to buy but the company that manages the 401K is. So no matter how you look at it, isn't it still the stock market?

edit: insert DisneySteve's post here cause I had virtually identical responses to your question

But to address your section in blue - you actually choose which funds you'll invest your 401k in, from the options available. And like DS said, there are always other options than only stock funds.


So if you tell yourself that you're sick of these swings in the 401k (which was invested in stocks), so you're stopping your 401k and are instead going to invest in a Roth IRA (which you'll invest in stocks) - you haven't solved your problem. You'd still be just as much at risk due to your stock investments. So then your problem isn't with the type of account, it's with the type of investment.

Or if you say, I'm just not going to contribute to my 401k anymore - what is your plan for saving for retirement?

[disneysteve]

I am asking if the ones that lost have seen a substantial increase or just piddling. It will actually give me a history on what can happen in a couple years from really bad to not so bad.

Here are some actual numbers from my portfolio. These are accounts that I have not touched - not added to, not taken from, not altered anything about the investments held in the accounts. I have just left them alone untouched.

Traditional IRA:
6/23/07 value - $18,449.85
12/31/08 value - $9,379.37
12/31/09 value - $14,199.97
Today's value - $17,725.30

So in 3 years, it dropped by 50% and has come nearly all the way back. Had I sold out during the crash, like so many people did, and parked what was left in some "safe" investment, I would have missed out on the whole recovery.

Now obviously if my crystal ball would have told me in mid-2007 that the market was about to crash, I would have sold and bought back in at the end of 2008 - wouldn't that have been nice. But the point is that in 2 years, the account grew by 89%. How many people missed that run up because they got scared and bailed out?

Here is another example, again an actual account that I did not touch at all during this time.

Rollover IRA:
6/23/07 value - $46,072.92
12/31/08 value - $28,308.15
12/31/09 value - $39,773.30
Today's value - $44,031.38

So this account has grown by nearly 56% in 2 years. And keep in mind that these numbers don't necessarily represent the bottom value that the accounts reached - just the values on specific dates. They probably dropped even farther than the 12/31/08 numbers indicate.

One final example. This is an active account that I continue to contribute to on a monthly basis. I was contributing before the crash, during the crash and since the crash, so the value has increased partly due to my ongoing contributions and partly due to the performance of the investment itself. This is actually a better answer to your question since you are talking about contributing to a 401k regularly, not just leaving an account alone and seeing what happens.

6/07: $49,481.35
12/08: $31,269.80
12/09: $45,093.80
Today: $58,688.76

So despite dropping by nearly $20,000 at one point, I've got almost $10,000 more in there today than I did in 2007. Why? Because as the value of the shares continued to drop, I kept buying more and more shares at a lower and lower price. When the recovery came along, I now owned a lot more shares with a lower cost basis and benefited a lot more from that recovery. Had I cashed out and stopped contributing in 07/08, I would have missed out on all of that.

[cicy33]

Very interesting all posts. Disney you actually answered my question perfectly. If I were to only look at your numbers I would be like "ehh you are pretty much where you were three years ago." However, of course, I am smart enough to also look at the ups and downs. I still haven't made my decision.

I would love to know one thing, Disney, how do you get more than one quote in a post!?

In answer to the retirement question. Pray alot!! lol seriously, this is why I am starting to ask questions. I can't begin this until December. So I figure I have a little time to make an educated decision. I am one that needs to research and ask questions to make sure I have all the necessary information to make the right choice. I have roughly 20 years until retirement.

I also did want to add to all of this and say that everyone was really nice and helpful with answers. I figured I would get a few of those that said I was just dumb but I didn't. so, great job Everyone!

[cicy33]

Therein lies the problem. If you only invest when it feels safe you will be buying high and selling low. I'm sure it felt safe to invest in early 2007 as the market was flying high but the economy was secretly rotting away. The best time to invest was from Nov 2008-March 2009 when there was blood on the street and everyone was saying the sky was falling.

Even most of the profesional fund managers can't even beat the index's. If they do this for a full time job and don't know when to get in and out then I surely don't know.

My best advice: Pick a diversified allocation you can live with (apparently yours was to aggressive) and periodically rebalance into said allocation.

Actually I invested in 2007 because it was the first time I had the option to do so. I had never had a job before that offered it. I had no idea what I was doing and did ask questions but figured it was a good idea also because they matched. I have never messed with this stuff before on my own because I just don't understand the concepts. and I have never had a significant amount of money to make any financial experts interested in talking with me.

[jpg7n16]

I would love to know one thing, Disney, how do you get more than one quote in a post!?

In the bottom right corner of each post, there is a 'quote' button, and immediately to the right of it, there is a little square button with a plus sign in it.

If you click that plus sign, it should turn orange and switch to a minus. This means you have "added" it (plus=add) to your posts you want to quote. Once you've clicked that button on all the posts you'd like to quote, scroll to the bottom of the page and click 'reply to thread'

Your reply box will have all the posts in it.


You can then edit around the posts by using some [ ] boxes to separate posts out (right beside the P key on your keyboard).

Like [ quote ] Creates a box like this [/ quote ] (without the spaces)

Creates a box like this

[Snodog]

Actually I invested in 2007 because it was the first time I had the option to do so. I had never had a job before that offered it. I had no idea what I was doing and did ask questions but figured it was a good idea also because they matched. I have never messed with this stuff before on my own because I just don't understand the concepts. and I have never had a significant amount of money to make any financial experts interested in talking with me.

Understood. My comment was not directed at you, but rather the hypothetical person investing in 2007. Sorry about the confusion as I can see how you would have thought it was meant for you.

Keep on learning and if you have any more questions feel free to ask away.

[disneysteve]

Very interesting all posts. Disney you actually answered my question perfectly. If I were to only look at your numbers I would be like "ehh you are pretty much where you were three years ago." However, of course, I am smart enough to also look at the ups and downs. I still haven't made my decision.

Keep in mind that you got damn lucky and got out just as the crash was starting. A great many people weren't so lucky. They waited until their balances had dropped by 30-50% (see my 12/08 values above) and then gave up and cashed out, thereby locking in their losses. Had they just hung in and waited, they would have gotten back virtually every penny they had lost. Only now, when the market is back to where it was, are folks like that starting to re-enter the market, but they've missed that whole run up in values. The people that made out the best are ones, like myself, who not only didn't sell but continued pouring new money in, snatching up shares when the prices were bottoming out. So while it might look like a 0% return over 3 years, the true personal rate of return is actually pretty decent because you have to factor in the increase in value of the shares purchased in late 08 and early 09 when prices were really depressed.

[cicy33]

Understood. My comment was not directed at you, but rather the hypothetical person investing in 2007. Sorry about the confusion as I can see how you would have thought it was meant for you.

Keep on learning and if you have any more questions feel free to ask away.

Thank you so much! now I understand how to do that.

Keep in mind that you got damn lucky and got out just as the crash was starting. A great many people weren't so lucky. They waited until their balances had dropped by 30-50% (see my 12/08 values above) and then gave up and cashed out, thereby locking in their losses. Had they just hung in and waited, they would have gotten back virtually every penny they had lost. Only now, when the market is back to where it was, are folks like that starting to re-enter the market, but they've missed that whole run up in values. The people that made out the best are ones, like myself, who not only didn't sell but continued pouring new money in, snatching up shares when the prices were bottoming out. So while it might look like a 0% return over 3 years, the true personal rate of return is actually pretty decent because you have to factor in the increase in value of the shares purchased in late 08 and early 09 when prices were really depressed.

I agree, I got lucky. I will probably contribute when I am allowed to. I have learned alot in the last few days. I will probably use a less risky option however.

[disneysteve]

I will probably contribute when I am allowed to. I have learned alot in the last few days. I will probably use a less risky option however.

And that is a perfectly reasonable way to go, at least initially. I would still recommend that you include some stock exposure as I think virtually everyone needs some. My 80-year-old mother has about 20% of her portfolio in stocks. You need some growth to stay ahead of inflation. But at the end of the day, you need to be able to sleep at night, not lie awake worrying about your money. Perhaps you can start with something like 80% bonds and fixed income and 20% stocks. That would be a very conservative allocation, though even with bonds, the value of your holdings can fluctuate up and down depending on interest rates, but the swings are generally smaller than with stocks. Plus, with 20% stocks, that will buffer that to some degree.

[cicy33]

And that is a perfectly reasonable way to go, at least initially. I would still recommend that you include some stock exposure as I think virtually everyone needs some. My 80-year-old mother has about 20% of her portfolio in stocks. You need some growth to stay ahead of inflation. But at the end of the day, you need to be able to sleep at night, not lie awake worrying about your money. Perhaps you can start with something like 80% bonds and fixed income and 20% stocks. That would be a very conservative allocation, though even with bonds, the value of your holdings can fluctuate up and down depending on interest rates, but the swings are generally smaller than with stocks. Plus, with 20% stocks, that will buffer that to some degree.

Exactly. I don't mind it not growing huge but I don't want to reach retirement or 80 and realize that I have less than when I began. I think one huge benefit for me is that this company offers a profit sharing. so that is totally free money for me.

[hard2figure]

I saw that disneysteve gave you some very nice and informative stats from his experience and cicy33 you commented that you thought he was pretty much where he was 3 years ago. I just wanted to add that he also said that he didn't add to those accounts. When you contribute to your 401k you would have been buying more "stuff" (whatever you choose to invest in) at what turned out to be REALLY low prices. Now that the market has come back those who didn't freak out and change everything (some cashed out like you, some sold their stocks and got into bonds, and some stopped contributing) actually are now coming out so much better off. I am 37 and got let go over a year ago but I was able to contribute until then and the whole time I was so happy that the market sucked. I knew I wasn't going to touch the money until I was 60 and that it had years to recover ... in the mean time I was able to buy many more shares then I could before. Even without being able to contribute to that account anymore it continues to grow because of the volume of shares it holds.

Also, the biggest reason to contribute to a 401k is your company match. People talk about the "free money" concept for good reason. If your company does the 50% up to 6% then you need to contribute that 6%. Think of it as a GUARANTEED 50% return on your investment! And it doesn't even care want you invest it in. You only loose if you don't take advantage of the match. If it helps you to sleep at night you can invest "your money" in something really safe and invest the "company money or match money" in something more aggressive, this would be a 67/33 split that kind of fits into many other poster's ideas.

[cicy33]

I have actually found that apparently my company does a full match and a profit sharing as well. that is awesome in my book. so that would be lots of FREE money for me!!!! of course less taxes when I withdraw when I am older. but by then I should be in a lower tax bracket too or at least the same I am in now.

[hard2figure]

A full match is great! Enjoy your retirement... *wink wink*