Monday, February 09, 2009

Dismal 401K Results. A Great Opportunity!

A colleague came to me earlier this week and commiserated that when he got his 401K statement for 2008, he found out that his 401K lost 9% in the last quarter of the year. He asked how my 401K was doing, and I admitted that I didn't know but that I could check on the spot and tell him. I logged onto the Fidelity website and checked the numbers: down 22% between October and December. My friend was shocked. How could I have lost 22% in the last quarter alone? I explained that since I have about 30 years left to retirement, I am aggressively invested and don't mind taking some risk for a chance at a higher return. My friend, who is much closer to retirement than I, was aghast.

I believe that my 401K asset allocation is appropriate for my age and risk tolerance, and besides, I manage our investment portfolio as a whole, not considering my 401K independently. My asset allocation in the plan is as follows: 70% S&P 500 index fund (this is a good fund with a 0.1% expense ratio - pretty impressive); 10% in a real estate fund; 10% in a bond fund; and 10% in an international fund. Normally my international allocation is closer to 30%, but the international fund offered by my plan is actively managed (I typically invest only in index funds) and charges a hefty expense ratio to boot.

As you would expect, all of my 401K funds have taken major hits over the past year, with the international and real-estate funds showing the biggest declines, as similar investments did in the rest of our portfolio. Nevertheless, I am unfazed. Retirement savings are the very definition of long term savings and with retirement approximately 30 years away, now is the time to take some investment risk in an attempt to grow a sizable asset cushion. It's not that I enjoy looking at these losses, but as I have previously written these declines represent an investment gold mine for those of us who will be net savers over the next couple of decades.

Hey, don't listen to me. Listen to Warren Buffet - supposedly he thinks now is a good time to be in equities.

What does your 401K look like these days?

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asgreen said...

I have such a long time until retirement that I'm doing my best to cutback so I can contribute more to my 403b. I'm also looking at it as buying a bargain.

Shadox said...

That's absolutely the right philosophy, so long as you are mentally prepared to take some more losses in the short to mid-term. In such volatile markets, you never know what's going to happen tomorrow, and the worst reaction is to over react and sell at the bottom.

Associate Money said...

If your friend are closer to retirement, then he will be more concerned with preserving principal than getting returns on investment.

Of course, he will be aghast with a 22% loss in a single quarter because it is not easy to earn back that amount again.

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