Just Don’t Look

Megan McArdle gives some advice for people freaking about their 401(k)s and IRAs.

I’m not sure I’d advise conspicuous and willful short-term ignorance of the status of your retirement accounts, but I think the core of her advice is advising people not to panic about the short-term gyrations of long-term investments, and in this respect she’s absolutely correct. My IRA is pegged to an index fund and it’s lost double-digit value in the last month; on the other hand I don’t plan on retiring for another three decades at least. So what am I going to do with the IRA right now? Not a damn thing. As long as you’re not planning to retire before the end of the year, I suggest you don’t panic about your retirement funds either. If you were planning to retire before the end of the year, may I suggest a second job.

26 Comments on “Just Don’t Look”

  1. If you were planning on retiring before the end of the year, presumably you weren’t planning on cashing in all your equity investments tomorrow. You probably would have some of your money in bond funds, some in cash, and some in equities. You’d presumably be planning on some social security income, and maybe a pension.

    It might be a good time to take a look at your portfolio to make sure there aren’t any huge red flags, but if you’ve been planning carefully, there may be no need to change your plans.

  2. Three points:

    1) Not panicing is a good thing right now. If you are in your mid-40’s and you have lost a whack o’cash, don’t worry, you will make it back and then some by the time you need it. Personally my portfolio is down 10% in the last month; I don’t need that money for more than 20 years so I am not worried.

    2) Portfolio composition matters. If you are at point in your life where a 10% drop in your equity portfolio is a killer then you have too much money in equities.

    A good rule of thumb for how much you should have in equities is 100-(your age) should be the percentage that you have devoted to equities. For a 45 year old that means have (100 – 45)% or 55% of the portfolio in equities. If you want some name dropping, the guy who told me this rule of thumb was a fellow named William Sharpe; he is a Nobel prize winner in economics for developing the Capital Assett pricing model.

    3) Unless you have a lot of time on your hands, stay out of individual stocks, and just invest in the various indices. There are a number of low cost mutual funds that invest in the Dow Jones industrial average or the S & P 500. You can also invest in those directly via Exchange Trade funds.


  3. I am, in fact, changing one of my retirement funds simply because now is a good time to pull out of emerging markets.

    Other than that? I’m actually pissed right now. The market tanks, and because of two house payments, I don’t have any money to pump into my 401k to buy up all those lovely cheap stock funds.

    On the other hand, because of declining home values and tightened credit markets, I’ve decided to stick someone else with the mortgage on my old house. In other words, I’M BECOMING A SLUM LORD!!! Mwahahahaha!!!

    [That’s a joke, people. Everyone I know who jumps into rental property calls themselves a slumlord in the beginning.]

  4. Most 401ks and IRAs are invested in mutual funds (because that’s the only choice their custodians give them). Your average person is fairly bad at choosing mutual funds, because the most prominent, readily available information is the recent share price. They will try to chase the “hot” fund, piling in at the peak, and then getting caught in the inevitable down-swing and selling at a loss. So not knowing the extent of any damage keeps people from making an emotional decision that may or may not be a smart decision. This is not to say that it’s impossible to make well-informed decisions, just that unless you actually know what you’re doing (as opposed to thinking you do), you’re more likely to get it wrong than right.

    If you are going to be a net buyer of stocks over the next few years, you should be happy that the price has gone down. To quote Buffett, price is what you pay, value is what you get. The value of most stocks has not changed drastically in the past few days, just the price.

    The important thing to remember is to keep putting money away. Over the course of the Great Depression, the stock market went up and down, but overall down. Yet if you had put away a small amount every month over all of those years, you would still have made money, thanks to the magic of dollar cost averaging: the same dollar buys you more shares of a stock when the price is low than when it is high.

  5. I think the biggest reason for standing pat and not panicking is that it is Probably Already Too Late. The stock markets have been kind of tanking in a gradual, majestic sort of way all year, and this sudden sharp shock just brought it to everybody’s notice. If you didn’t do anything about it back in, say, January, your money is already lost. Fooling around now won’t get it back, and will likely make you lose even more.

  6. @tceisle: that’s exactly it. I used to work for traders who live and breathe this stuff. The notion that I could time the market better than them is laughable, so I change my allocations every few years, and don’t really look at the balances except for then.

    Professionals make money buying low and selling high. To do that, they need somebody else to sell low and buy high. I’m not interested in filling that role for them.

  7. Wasn’t Megan McArdle the original “Annie” from the stage play? If so, I guess she’d know all about hard-knock times…

  8. Back in the 70s some scientist (I’m sure someone on this site can find out who, it would be interesting to have the orginal citation) announced the timetable for the death of the Sun, some X-billions of years from now—and the stock market dipped considerably in response.

    One of the things we all ought to bear in mind is the relative drop happening now. We’re below 10,000. Oh, my. The stock market has lost around 10% of its former high? People are expecting another Depression. But when that occurred, the stock market lost somewhere between 40 and 60% of its total value and did not climb back up to its high mark until 1954—404.

    The sheer size of the market will act as something of a buffer.

    But with banks beginning to fail in Europe and Asia, the reverberations will continue for quite some time and it won’t be pleasant. I, for one, am so glad my house is paid off.

  9. I’m taking a philosophical approach: yeah, my net worth is in the tank, but 1) I’m not retiring any time soon, and 2) I put aside a constant dollar amount in my IRA and 401k, so I’ll be buying more shares. Hooray!

    Thank $diety I’m only 30.

  10. I’m not panicking. That inflation-proof stash of Beanie Babies is stored in airtight containers in the attic, ready for that glorious day in 2038.

  11. Provided this is not the beginning of the end, the dollar cost averaging argument works for me. (Woo! More pie.)

    If, however, this *is* the beginning of the end of the market as we know it, well, we’re *all* screwed.

    What, me worry?

  12. I’m kind of glad I took a dispersal on my IRA last year. Makes the sting of this business less stingy. I’m just telling people to stay healthy because it means fuggall if you’re to sick to do anything with your IRA.

    Like you don’t have enough on your plate, but you ever thought of doing an investment column again? Barefoot Investing, perhaps? As long as it doesn’t interfere with your fiction output, though.

  13. We bought a little stock last week. It promptly dropped more, but we believe it will come back.

    As for our retirement funds, yeah, they’ve lost an ugly amount of money this year, but we probably won’t be retiring for about 10-15 years (or more) so the funds can sit there. Short of a worldwide prolonged bank/brokerage meltdown, I think they’ll be OK.

    As we live in an area that had no housing bubble, we’ve actually not lost much on the value of our house over the last two years.

  14. We have “lost” on our investments recently but, as I keep telling the wife, the loss is on paper and is not real until we start taking money out. Now is not the time to cash out. If we have any extra cash now is the time to buy. Some purchases tank but others will grow in value.

    I have a slightly different worry from most right now. My father is slowly dying AND my mother had a stroke and fall over the weekend. I am facing the demise of both of them occuring soon and close together. On the back burner of my mind is the worry that my only sibling will want to liquidate the estate at once and divide up the cash. Not a good time to do so. I would much prefer to keep the stocks and sell when they are higher.

  15. @ 8 Mark

    AND the banks failed. If our banks hang in there, it won’t be another Depression, even if the markets fall further.

    Point to consider:
    If your 401k is matched by your employer, you would have to loose 1/2 of your investment to come out behind (not counting inflation & fees) but still most people wouldn’t be putting that much money away anywhere except for the draw of the the matching funds.

    THE END OF THE WORLD is further away than it seems.

  16. A dear friend’s husband is lucky he ain’t dead. His account was down $20,000 so he pulled it all out and put it into something “safe.” Um, it isn’t lost until you sell….. She is livid and he may never see her nekked again, heh. And they, like me, have about 27 more years until retirement….. oy vey. Y’all, that boy ain’t right.

  17. That’s it.

    That 1st edition “Harry Potter and the Philosopher’s Stone” with the typo in it is going in a bank vault, like yesterday.

  18. This is exactly the right time to sell if you believe the market is going to continue going down. There are lot of people whose opinions I trust (Barry over at The Big Picture for one) who think this is only the beginning of the market decline. People are talking about the S&P dropping to a P/E of around 5, before we start seeing movement the other way. That means there is a huge amount of bleeding still to come.

    Numerian, over at The Agonist, is predicting a year-end rally on optimism followed by a much larger crash next year. The fundamentals don’t do much to discredit his ideas.

    Personally, I’m thinking we may not see a year-end rally at all. It really depends on how Q3 earnings do and if more states follow Cali and Mass down the road to insolvency (and how quickly the insolvent states are able to get loans, which is looking bad right now). I think that no matter how you slice it, next year is going to be a terrible year for the markets and the world economy in general.

    Holding on to volatile assets during an economic crisis is a fool’s game. Lets run some simple numbers. I sold all the equities in my retirement accounts about a year ago (except some european index funds, since I was expecting the credit crisis to sink the US, but that Europe would decouple. Boy was I ever to optimistic about that). That was back when the Dow was around 14,000 (remember those days?).

    Now the Dow is sub 10,000. I would not be surprised to see a sub 7,000 Dow at some point. But anyway, that is a 33% drop in the last year. Say that you and I both had 10,000 in the market last year. I sold, you didn’t. Right now, I’ve got 10,000 and some change. You’ve got 6,666. When the market starts going back up, I wait a while to make sure things are stable and then reinvest. I reinvest when your portfolio is worth around 8,000. We both ride the upswing, except I have a massive head start.

    I’m not talking about market timing here and trying to make money on every bounce. I’m talking about looking for general long-term trends. This is not financial advice. But if it was me, and I looked around and saw that there are substantially more losses coming in the market, I’d get out now. Better to sell at a 33% loss than a 50% loss. Your existing loss is a Sunk Cost. You can’t get that money back. But blindly holding since it should eventually go up will just cost you more money. It will be pretty obvious when things get straightened out and the markets start to rebound. Just like it was (to those paying attention) pretty obvious last year that this storm was coming.

    Yeah it sucks to take a 20,000 dollar loss right now. But wouldn’t it suck more to take a 35,000 dollar loss later. Just because you didn’t sell doesn’t mean you haven’t taken the loss.

    This is not financial advice. I’m not telling you what to do with your money. BUT do not fall into the trap of thinking that since it is on paper, you’re not taking a real loss. You are. And will kill your portfolio performance and ability to eventually retire.

  19. @16 mark

    If the worst happens, you and your sibling should divvy up the stocks, and then you can each do as you choose with them. That’s easy to do; when my mother died, neither we nor our lawyer even considered doing anything else.

    Of course the house (and any other non-divisible property) is more difficult (for the record, we sold my mother’s apartment, but this was long before the housing crash so it wasn’t an issue).

  20. I think the market is going down, but not 20-years-going-down. 401k stays where it is. What new stock I do have is mostly RSUs from The Company, which I don’t have to pay for (but I do have to pay taxes on when I sell, so selling right now is probably not a great idea; they’re young enough to earn a 15% tax rate right now).

    I’m not too worried about The Company.

  21. Ouch. I was originally planning to retire this summer, needless to say I’ve postponed until at least next summer, and very possibly for 3 or 4 more years, depending on just exactly how deep a pit the Ponzi debt salescritters have dug for us this time out.

    On the other hand, most of my savings is in a managed retirement account, and I convinced my manager more than six months ago that he should start moving me towards income holdings, not only for retirement purposes, but because I was sure this mess was going to catch up with us (though even I, cynic that I am, didn’t expect this much tsuris).

    My advice would be to hold out for a little while before starting to buy up those “cheap” stocks. If the sky really does fall on us, the market is going to tank a lot more, so you want to wait and see if prices go down some more. This economic “downturn” isn’t going to be over for another year even in the best case, so there’s plenty of time to shop for bargains.

  22. If you own a whole life policy from a mutual company you should be happy, its paying divedends better than any equity out there . If anything I would say thats a fourth asset class, but most see life insurance as a bad investment. I say suck it suckas, I’m getting 8 percent divedends with guaranteed cash value tax free (if i should choose to take the cash value out the policy). So to hell with all those Prime America jerks who say buy term and invest the difference (no one ever invests the difference they just spend it on crap they dont need). HAHAHAHAH…CHUMPS!!!

  23. Also Mad Kramer or whatever his name is, on MSNBC, do people still listen to the bad advise he gives. You know the Lehmans, and the other stuff he told people not to sell. I have a problem with people like him and Orman who give blanket advise to people and I have even more issues with people who eat it up.

  24. A coupla observations:
    1) Yes the market has already tanked, but does anyone believe we’ve already hit the bottom? Taking your money out of equities now might actually save you from further losses. The reason the pundits tell you to sit tight is so that the panic doesn’t spread even further. This is the smart thing to do for the sake of the overall market, but not necessarily the smart thing to do on an individual basis. It’s a bit of a prisoner’s dilemma. The flip side of this is that it’s just as hard to time the market going down as it is going up. We could be at or near the bottom in the next couple of weeks (say around election day), and in that case pulling your money out now WOULD be stupid.
    2) The rule of thumb of 100 minus your age will leave you short of retirement funds if you start applying it too young because you’ll be under-allocated in equities. As I recall it’s meant for allocation AFTER you’ve already retired.
    3) Anyone who had most of their retirement funds in equities throughout this year isn’t going to be retiring for at least 25 years regardless of their current age.

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