What to Do With Your 401(k) or 403(b) Now?
- Wednesday, November 05, 2008
Millions of people around the world and here in the United States have been affected by the financial markets’ swoon this autumn. Plans to retire early have been set back. Dreams deferred. People are terrified to open their investment statements. If you have a 401(k) or a 403(b) retirement savings plan, what can you do now?
While prayer and hope are, unquestionably, important, now is the time for level-headed coolness in light of what is likely a deep, but only a temporary, set back.
Reading about what has happened, focusing on the possibility that “this time it’s the next Great Depression” (which I seriously doubt), watching the stock ticker on TV is not very helpful, and will only scare you more. Here are some practical, historically-proven steps to control the things you can, not the things you can’t. These steps will require faith, courage, and discipline. Without those virtues, we can’t be good steward in this crisis.
1. If you have not started saving for retirement, there could not be a better time than now to start, since assets – stocks, in particular – are on sale at 40% off. If you have started, keep saving. Save a lot. Persist. Save aggressively but invest prudently. Through thick and thin, keep investing. Keep it up. No matter what. Don’t expect it to be easy. Spend less on lifestyle and foolishness.
2. The kind of investing that is right, if you’re saving for a goal one year away is NOT right if you’re investing for 30 years away - or even 10 years away. That means that stocks – equities – should be a considerable part of your long-term retirement portfolio. In spite of the recent crash, stocks are still the engines of growth for any long-term portfolio. No other asset type has returned as much over the long term – including the current crash. On the other hand, cash is a terrible long-term asset.
3. In saving for retirement, develop an equity-oriented portfolio composed of a well-diversified mix of low-cost, no-load (that means “no sales charge”), major index mutual funds, covering US stocks, Foreign Developed Market Stocks, Emerging Market Stocks, Real Estate, and US Treasury issues. Don’t fret if your allocation to one asset class, say US Stocks, isn’t doing well. Then, occasionally, after a market rout such as we’re going through, rebalance your retirement portfolio back to the percentages that you originally sought.
4. Pay attention to your investment expenses. You can’t control your returns, but you can control the costs you pay to pursue those returns. And don’t feel, except to rebalance, that you always have to be doing something: don’t move money around for no reason, even if, like today, performance in some of your investments is way off.
5. Remember, your goal should not be to “beat the market.” It should be to capture as much of the return offered by the market as you can get prudently get, which means taking only sensible risks. Your goal should also be, as much as it is in your power, not to lose significantly in any year. However, do not expect your portfolio to rise every year. Over time, and with discipline, patience, and regular rebalancing of your portfolio, you should earn about 8 -10% per year. Don’t expect the kind of portfolio I’ve suggested to grow at 16% a year. Some times it will – especially after times when it has been trounced. But it will not rise 16% a year often. And when it does grow at 16% for a few years, EXPECT the portfolio then to UNDERperform for a time. Remember, that at 8-10% per year growth, money doubles every 7 to 8 years.
6. Remember, over your long term investing horizon, there will be times – like now - when nothing seems to work, when markets tank, when no matter what you do, something goes wrong. When those times come, HANG ON. Ride them out. Continue to invest. Keep investing as share prices fall and your investments buy more shares. Keep your asset allocation percentages. And keep rebalancing. This, too, shall pass.
7. And lastly, I hope – oh, boy, do I hope - that in your retirement years you will have more to look forward to than just retiring. More than just another golf date each morning or, say, afternoon drinks on the veranda. As you save money for your retirement - and you simply must do that - think, explore, plan, dream about things you’ve always wanted to do, as well as things that might leave this broken world a little better off from your having passed through. Try, with God’s help, to make a difference.
What are you tending to become?
James O’Donnell is an author, professor, and former financial services executive with major firms in New York and Boston. He has written Letters for Lizzie, Walking with Arthur and, most recently, The Shortest Investment Book Ever, a timely, practical guide for millions of people – and their employers – who save for retirement through 401(k) and 403(b) plans. The Shortest Investment Book Ever is published by Northfield Publishing, Chicago, and is available for $8.99(or less in bulk) from the publisher, in bookstores, and online. For more information, go to www.shortestinvestmentbook.com.
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