Reader Patricia Love e-mails:
I’m losing money hand over fist. I’m losing it in my 401k (each month, I have less than I had the month before–and that’s after my 15 percent contribution), I’m losing it in my IRA, and I’m losing it in my Roth (neither of these accounts has a huge balance, but I’ve lost about 35 percent of its value). The only place I’m not losing money is in my savings account at the credit union, and you can imagine how much interest I’m (not) making on that money.
The guy at the firm that manages my IRA and my Roth says I can’t really do anything with those funds–change the distribution, move them into another account, whatever–because then I’ll lock in the losses. He even says I should try to put more money into these accounts so I can take advantage of the low low prices of stocks. I understand this rationale, but I don’t really want to put my liquid funds–which are not losing any money where they are–into my IRA and Roth, and I don’t want to divert money that I’m putting into my current 401k into these two accounts.
If I’m not putting money into those accounts, is it really “locking in the losses” if I roll them into my current 401k? (Can I even do this?) Or if I change the distribution to a more stable mix of accounts? These are questions I don’t feel like I can ask my investment guy because he wants me to keep my money with him (his company administered the 401k of my last job, so when I left that job, I just kept the money with his firm). I don’t know anyone from the firm that manages my company’s 401k plan, so I don’t feel like that’s an option. And if I go to someone from another investment firm, they’ll just want me to put my money there.
I’m not a financial dunce. I have no credit card debt, I have a 30-year fixed mortgage, I balance my checkbook each month, and I have a superawesome credit rating. But I’m not savvy about finance at this level–figuring out how best to ride out this recession is just a little over my head.
Who is the best person to help me with these kinds of decisions?
I told her maybe she ought to talk to a fee-only financial planner, or read Jack Bogle’s Little Book of Commonsense Investing or William Bernstein’s Four Pillars of Investing or Walter Updegrave’s advice column. And then I said that in general it seemed like she ought to keep doing what she’s been doing. If her IRAs were stuck in high-fee funds she ought to move them somewhere else, but beyond that making big changes in the middle of a bear market was probably a bad idea. Because eventually stock prices will recover and then that money she’s pumping into her 401k right now will grow and yada yada yada.
Then I got another e-mail from another reader:
I’ve been hearing people say that people that don’t expect to withdraw money from the stock market for 30 odd years shouldn’t be worrying about anything and should continue to invest in their retirement because of course by that time the stock market will have gone back up and all the value will be there. … What exactly is it that makes the stock market (which for the most part isn’t even actually about investing money in a company but a bet that a company’s value will go up) an actual good idea compared to incredibly safe investments like CDs or my own education? Also, doesn’t this make my generation (mid-20s) suckers for allowing companies to eliminate pensions and to treat 401k matching as a luxury (one that’s been stopped in addition to raises, bonuses and grounding the corporate jet) during this economic downturn?
Anyway, it just seems like we’re being sold the idea that over the long term the stock market is guaranteed to go up and I think the history of the last hundred years shows pretty definitively that this is only true if you’re lucky enough to take your money out before the market collapses from one dumb scheme or another.
Over the long run stocks have been better investments than bonds or CDs. Not necessarily because prices have gone up—dividends have been a huge part of total stock market returns over the years, and the sharp decline in dividend payouts in the 1990s should have been a big flashing warning sign for investors. But if your individual long run doesn’t happen to match well with the cycles of the market, stock investing isn’t necessarily such a great deal at all (this is why Zvi Bodie thinks you should invest your retirement savings in inflation-linked Treasuries, and why Teresa Ghilarducci thinks we ought to replace the 401k with government -sponsored pensions).
That, and of course there’s no guarantee that the long run of the future will look like the long run of the past. Although the current bear market is demonstrating why stocks should in theory deliver higher returns over time than CDs or Treasuries—because they’re much riskier, and stock investors need to be paid more to take on those risks.
All that said, now seems like a pretty bad time to be switching out of stocks and into Treasuries. Doesn’t it?