Dollars and Sense: Investments

With the market down 40% this year, everyone is wondering what to do with their 401k plans?

Do not withdraw. There were $19 billion in withdrawals from mutual funds in September. That same amount was pulled in just the first six days of October. You have to be invested in the market in order to benefit over the long-run, so don't hurt yourself by selling into bad news.

So the key lesson is "don't try to time the market"?

Exactly. When the market is significantly down one year, the next year tends to be a big year. However, you never know when the big days will come and it is crucial that do not miss them. The best 90 days from 1963 to 2004 took results from 3.2% to 10.8%. That is an enormous difference in gains. During this same time period, less than 1% of trading days accounted for 96% of the gains. This is a clear example that you cannot time the market or predict when to re-enter and that trying to do so can be deadly to your returns. If you become scared and make drastic changes to your 401k contributions, you will miss the benefits when the market rallies.

OK, so we shouldn't stop contributing to our 401k, but is this a good time to increase our contributions?

Absolutely. If you are in the position to add more pretax dollars to your 401k, by all means, do so. At the very least, you should be contributing the amount your employer matches. This is free money and you have to take advantage of it. For many companies, enrollment occurs at the beginning of the year. Now is the time to consider if you will be in the position to increase the portion of your paycheck you put towards your 401k. Also, for many companies the first of the year is when employees receive their annual raise. If you think you will be getting a raise this coming year, think about directing half towards your 401k.

What about stocks? What we're hearing lately doesn't sound good. Any advice?

Stocks are cheap right now and you can get once in a lifetime deals on companies that are normally priced significantly higher. If you invest for yourself, choose companies that you have done a lot of research on and feel you know well. In this kind of market, some companies just are not going to make it, so you have to be careful. The same advice goes for those who invest through mutual funds. Look for managers with a solid history a patient approach to investing.

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