Over the years I’ve seen many 401k plans, mine, my wife’s, family, friends, they come in all shapes and sizes and all have their own drawbacks and advantages. Options are limited, fees can be high for the services provided and some folks, if not many, can find the funds offered confusing and hard to understand.
If you’re nodding your head right now, congratulations, you’re probably on the way to a comfortable retirement because you’ve made the effort to becoming aware of all of this already and certainly don’t need any help from me or anyone else for that matter. But let’s continue anyway.
If you’re not contributing to your 401k, start Monday, if your employee will let you, you’re passing up free money. If your employer matches dollar for dollar up to 4%. At the bare minimum you should be contributing 4% or whatever amount gets you that full match. By not “participating” you’re literally setting 4% of your salary on fire. It’s the only free money there is. They’re not going to write you a check for not participating at the end of the year. Plus, you lower your tax burden today as your contribution comes out before income taxes are assessed. That’s quite helpful for a number of reasons, but particularly so if you live in state with income taxes today but live in a state without during retirement. Let that marinate for a moment. Okay, let’s move on.
If you’re into your 50’s now and have followed this sage wisdom for a few decades you probably have quite the tidy sum built up and really don’t like the idea of “giving some back” during a serious market correction. Let me put your mind at ease. You will before you retire and there’s nothing you can do about it, but you’ll still have more saved than you do today.Feel better? Oh, that’s right, you can go to cash as Brian Kelley of CNBC”s Fast Money has suggested, twice this past week.
I don’t want to be vague about this so I’ll simply say going to 100% cash in your 401k is probably the worst financial decision you can make in your life and really anyone suggesting otherwise is either not invested in a 401k, or is trying to make a name for themselves with a big “market call” using your money. I’m not sure this is has bad as making the bold call of not reinvesting your index fund dividends quarterly as “putting my money where my mouth is” but it’s pretty close.
I’ve debated this with people before. Sometimes I’ll hear, “I’ve had some luck timing the market before.” My response to this rationale counter point is typically, “What’s that word you just said before timing the market.” The discussion usually ends shortly thereafter.
Here’s a stat I tweeted earlier this week. In 2014, the S&P had a return of 13.7% but if you missed just the top 10 days in the market that year, you would have suffered a loss of 3.1%. I’m sure that can be timed. Go ahead try. If you’re going to say that’s just one year, there’s plenty of other examples just like that one and I’m not even going to address compounding dividends and capital gains. (which add up quite nicely, look at your year end statements over the past 5 years)
One of my favorite books that addresses wealth accumulation is “The Millionaire Next Door.” If you haven’t read it, you should. You may not agree or be persuaded by everything in the book, but if nothing else, it will make you think about your financial goals and savings. I’m not sure anyone can spend too much time on the subject.
The book is basically a study of the habits of millionaires and their findings can be surprising to some. For example, of the millionaires surveyed or spoke to, 95% owned stocks with most having at least 20% of their wealth in publicly traded companies. Strange, that doesn’t really suggest this whole thing is a casino.
The authors then go on to reveal that many millionaires don’t follow the stock market on a day-to-day basis. I guess you would call them passive investors. (I know, that’s code to many of you for lazy, but hang in there.) Thinking that there’s probably another way to make money in stocks, the authors right went to the floor of the NYSE and asked many stock brokers about this phenomenon and they believe one stated it best.
“I’d be rich if I’d just keep….(my stocks, but I) can’t help but make trades in my own portfolio. I”m looking at the screen every day.”
What’s the definition of insanity again? The purpose of this isn’t to discourage trading stocks frequently. You certainly can do well, but I devote a certain percentage of my overall stock market portfolio. That way if I screw up, which happens often, the rest that I have “idiot proofed” can help out my savings. Part of that is regular contributions to retirement accounts and a 529 for my children’s education.
If you have a trading portfolio, certainly, have some cash on hand. But shouldn’t you always? Otherwise, you’re sort of in a position to be a forced seller at any given time, especially if you use margin. Also stupid. Go find a wealthy person in their 60’s who contribute a majority of their savings to trading on margin for any length of time or timing the market in the 401k. Let me know when you do. I won’t hold my breath.
Do I think the market can go lower? I expect it to. Do I have a fictional number that I’ve come up with as to where a significant bottom can take place? I do not. That seems like a huge waste of time. I bought Verizon (VZ) and International Paper (IP) last week. The carriers seem to finally be gaining some leverage on the actual smartphone makers now and Verizon is nicely tied to the United States. While Amazon is redefining human history as many like to pontificate on, International Paper makes boxes they ship all this stuff in, seems to me IP should be ok and both pay close to a 5% dividend.
Sorry, got off track there. Let’s say you have a fictional target your magic chart showed you one night in your sleep and the market hits it at 1:00 p.m. Thursday. So you log into your 401k and buy back everything you had sold when you decided to go to all cash. You know you get the price at the end of the day right? The market could rally significantly from your target and you end up buying in much higher than your magical target. Now what?
But let me tell you what you do guarantee yourself. Fees!!!! Oh, BK didn’t mention that. When you sell in a 401k there are fees involved and, oh by the way, you can freeze yourself from buying back certain funds for up to 60 days after selling them. I hope your magic target isn’t hit during those 60 days. It’s okay, you can wait for the next correction if you miss out on getting back in. Also, please don't confuse a 401k plan with an IRA or RSA that allows you to own individual securities or ETFs which can be bought and sold throughout the day.
In closing, I saw a lot of people saying that it was pretty telling that Kelly was getting harassed so much for being bearish on Twitter and other places. I have no problem with anyone being cautious or bearish at any given time. My problem is telling people to treat a 401k plan like a trading account. That’s dangerous and the fact that the following day they coaxed him into repeating himself on Fast Money in the mere attempt to start a verbal spat or goose ratings. Shameful, Did you notice how Guy Adami just sat there with his mouth shut? Does he ever do that for that long a period of time without offering a sharp quip or pertinent information? My guess is he knows it’s stupid to try to time the market in a 401k so he just kept his mouth shut. This stuff isn’t hard to figure out.
I know I can’t predict “black swan events” which, put another way, are called “life events”. I do know if you equally distribute compounded savings over a period of decades you’ll probably have a nice retirement. You can thank me later, like 2050.