Wall Street and the Bleeding Retirement Accounts

by Kevin on September 25, 2008

Wall Street has tanked over the past week or so. Drops of 3% or more on some days. Even if you listen to my advice about being average, you simply can’t avoid the impact on your portfolio completely. (To do so you would have to be primarily in cash or in investments that go up when the market goes down.)

So what do you do while the market seemingly crumbles around you?

Don’t Panic

I mentioned this when I told you I was witnessing history and avoiding the panic button. Panic filled (or really any emotion) decisions to make drastic changes to your portfolio are probably not going to be the wisest moves. If everything goes down, your gut tells you to sell everything and get into safe investments.

As we all know, that’s buying high and selling low. When things go down you should see it as an opportunity to buy at cheaper prices (if you have additional capital available).

Take a deep breath and step back before you doing anything drastic.

Look at Your Retirement Timeframe

Are you retiring tomorrow? Based on the results of my reader survey, there are few of you in this situation. Most of my readers are in the 20s to 40s age range.

The older you are the less volatility you want in your portfolio. If the market tanked 20% today on someone who is 62, the odds of their retirement accounts bouncing back within three years is pretty slim. For someone at age 25, you’ve got 30 plus years to have your portfolio go up. You’ve got time.

Now for those near retirement, it is time to take a serious look at your asset allocation.

Analyze Your Asset Allocation

Times like these provide excellent opportunities to take a look at our asset allocation. I talked about asset allocation when I rebalanced my Roth 401k. Essentially asset allocation says I want X% in stocks and Y% in bonds or income assets. If the percentages are out of whack, you sell some of the higher percentage and buy some of the lower percentage to get them back into balance.

It’s another way to sell high and buy low.

Look on the Bright Side

If you are continuing to invest in your 401k or IRAs, take a look at the bright side of life. If retirement is far off into the future, you are being given an opportunity to invest more money at lower prices today. Rather than having the market continually going up and investing at higher and higher prices along the way, you’re getting to invest at rock bottom prices. When the market eventually goes up, your shares will be at a lower cost basis than they would have been otherwise.

Oh, and a final note. To help you stay positive, a last piece of advice: don’t check your balances every day. Stay with your automatic investment plan and just roll with the punches.

I’m curious — have any of you out there made any drastic changes to your portfolio due to the financial crisis? Leave a comment and explain what you have or haven’t done.

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[email protected] September 25, 2008 at 7:55 am

I read parts of The Long Emergency a few years back. I say parts of because it scared me so badly I had to put it down. But it certainly put me in mind of the fundamental precariousness of what we commonly call “our economy.” So I’ve been lobbying my husband steadily to sell off as many of his options as he could stomach for the past few years. The preponderance of those options unbalanced his portfolio anyway, so there was another argument there. We haven’t done any panic selling, but I have asked him if to look into selling a mix of high value and low value options so that we could put a large chunk of cash towards our mortgage without getting hit by a huge tax bill. In other words, we’d sell some stocks at a profit, others at a loss, so that our capital gains are minimal, but we still get the money.

In general right now, paying down the principle of our mortgage looks like the safest “investment.” It has looked that way to me since we got the mortgage two years ago. The economy is only helping me to bring the spousal unit around to that way of thinking.

Joe - Va Beach September 25, 2008 at 8:01 am

The drastic changes I’ve made aren’t so drastic. I had some money on the sidelines and sold one stock that had been languishing for a while.. something I should have done long ago.

I took $350 I had sitting as Money Market in my IRA @ and bought 480 shares in Freddie Mac @ $.78 share, closed 9/25 @ $1.89.
I sold my Qualcomm shares, bought way long ago and bought 6000 shares of Fannie Mae @ $.70, closed 9/25 @ $1.74.

I’m 45 right now, so I have some time until retirement… probably at 80 🙂
I’m hoping to ride this up for a good bit, but don’t see it as a long term hold.

Russell September 25, 2008 at 5:37 pm

No changes, although I have looked at my investment balance a few times in the past 10 days for observation only. The swing in values was milder than the market indicators, and overall I’ve ended up within about 1% of where I was 10 days ago.

I’m going through a transition from employment to self-employment (contract), so I’ve had to postpone any new investing while expenses of setting up an office are taken care of. I should be opening a new IRA account next month which may be good timing.

I did consolidate some accounts in the past 4 to 6 weeks, but I stayed in similar investments to keep myself in effect without change. Some fixed-income annuities I moved into other fixed-income annuities, the stock mutual fund 401(k) accounts moved into other stock mutual fund IRA accounts. It was tough to see the rollover statements showing how much my investments had decreased, made me wonder if the whole 401(k) idea cost me money, but selling bargain-priced funds for other bargain-priced funds I figure either one would recover about the same.

I did roughly calculate those rollover losses to the extent to see if the employer match at least exceeded the loss incurred, and they did. And having more dollars (from tax deferral) invested should pay off in the long term. If those funds were solely employee contribution I’d really start to wonder about the wisdom of the tax deferred account.

-R-

Kevin September 26, 2008 at 11:23 pm

@Kate: The only problem with paying down the mortgage that quickly is the real benefit lies in paying it off completely. It does save you interest, but the money is inaccessible once you pay it toward the mortgage (HELOCs and the like are out in this credit market). I would rather save the money in a high yield savings account and build up to the point where I pay it off in one fell swoop.

Of course paying it off early, piece by piece, saves you interest in the long run. It depends on how quickly you can pay it off and what the rest of your situation looks like.

@Joe: Interesting investments you made there — with quite the return. Planning to sell to quickly net your profit?

Also curious if you saw this as an investment, or more of a quick bet. Let me know!

@Russell: Not sure if the tax status of your investment has much to do with the overall return in a bear market. Care to provide extra insight? Taxed or tax-deferred, the holdings have gone down either way.

At least you get that match!

Russell September 27, 2008 at 7:41 am

When I questioned the wisdom of the tax-deferred account, it wasn’t that feature I was doubting, but the long-term commitment (loss of use) of the funds. I was thinking about the choice that was made to make the investment into these accounts, rather than take it as disposable income and offset costs of living, home improvement, avoiding taking on other debts.

I hope the advantage of IRA and 401(k) in the future doesn’t turn out to be, you’ll save income tax because you’ll have a lot less money when you withdraw it.

Joe - Va Beach September 27, 2008 at 1:15 pm

@Kevin,
I’m going back and forth between monitoring the ‘rescue’ plan and pulling out for a quick profit and hanging on for the long term.

I definitely saw it as a ‘buy’ opportunity. Had I used non-IRA funds for this, I probably would have done it as a quick win and paid down other debt.

I’ve got plenty of time until retirement, so I’m also considering just keeping it for a while. If it tanks, I’ve only lost $5000 and have time to make it up.

My other investments haven’t been doing that well, so I stopped contributing to my 401k back in March and have been using the snowball method to pay down my debt. I was losing around %13 on my TransAmerica funds (through my employer) and then paying around 11% on the debt. At my current rate, we’ll have our car loan paid off in November, credit card debt in April 2010 and just have our mortage by April 2011.

Kevin September 29, 2008 at 12:58 pm

@Russell: Gotcha. Understood. That’s why we’re sticking with Roths… simply because taxes are bound to go up.

@Joe: Sounds like your fate depends on how the market reacts to this bailout. Doesn’t look good right now…

karla (threadbndr) October 8, 2008 at 12:26 pm

I’m still putting the same % into the 401(k) at work and the same $ into the Roth. I was talking to my mom this weekend (she was a teenager in the Great Depression) and so long as I have my job and can pay my taxes, I’ll make it. No mortgage (I own the house free and clear) and have little to no personal debt. In her view, the people who survived well during the 1930s were those who had land without a mortgage on it.

I AM looking at ideas for some side income flows, though. I want to pump up the emergency fund and stock up the pantry. There will be a garden in the back yard next summer, too. And I’ll be couponing more. Free cash flow is the key to getting though this.

I am strickly not looking at my account balances! I know, but I don’t want to KNOW (lol)

Kevin October 8, 2008 at 6:37 pm

@Karla: Wow, congrats on owning your home free and clear. Wish we were in that situation. Good perspective as well for down times. Pay your bills, stay above water, and prepare for the worst.

I’m also going to be writing about side incomes some time in the future. I think everyone would like to make a bit of change on the side.

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