October 7, 2008
@ 03:37 PM

I logged in to my 401K account today and was greeted by the following message

Personal Rate of Return from 01/01/2008 to 10/06/2008 is -23.5%

Of course, it could have been worse,  I could have had it all in the stock market.

I've been chatting with co-workers who've only posted single digit percentage loses (i.e. their 401K is down less than 10% this year) and been surprised that every single person in that position had hedged their bets by having a large chunk of their 401K as cash. I remember Joshua advising me to do this a couple of months ago when things started looking bad but I took it as paranoia, now I wish I had listened.

Of course, I'd still have the problem of having to trust the institution that was holding the cash like the guy from the MSNBC article excerpted below

Mani Behimehr, a home designer living in Tustin, Calif., isn't feeling reassured after what happened to WaMu and Wachovia. After he heard the news that WaMu had been seized and sold to JP Morgan, he rushed out to withdraw about $150,000 in savings and opened a new account at Wachovia only to learn about its sale to Citigroup two days later.

"I thought this is the strongest economy in the world; nothing like that happens in this country," said Behimehr, 46, who is originally from Iran.

At least I don't have to worry about living off of my 401(k) anytime soon.

Update: A commenter brought up that I should explain what a 401(k) account is for non-US readers. From wikipedia; in the United States of America, a 401(k) plan allows a worker to save for retirement while deferring income taxes on the saved money and earnings until withdrawal. The employee elects to have a portion of his or her wage paid directly, or "deferred," into his or her 401(k) account. In participant-directed plans (the most common option), the employee can select from a number of investment options, usually an assortment of mutual funds that emphasize stocks, bonds, money market investments, or some mix of the above.

Note Now Playing: Abba - Money, Money, Money Note


 

Tuesday, October 7, 2008 3:57:50 PM (GMT Daylight Time, UTC+01:00)
A quick explanation of 401k might help your non-US readers have some sympathy. Is it some sort of tax thing?
Tuesday, October 7, 2008 4:07:29 PM (GMT Daylight Time, UTC+01:00)
Done.
Tuesday, October 7, 2008 5:42:55 PM (GMT Daylight Time, UTC+01:00)
Well, cash really doesn't make any sense whatsoever at all because you loose wealth by definition (inflation). By the way, if people say they have stuff "in cash" but really have it with their bank (as opposed to "under my bed in green paper"), then they are not holding it in cash. With cash there is no risk of your bank going bust, in particular you didn't lend it in that case to your bank (which of course lends it out right away), but really hold on to it.

If you are super, super risk averse buy treasury bonds. Yes, the US government might go bust, but in that case your cash is worthless as well. Treasury bonds on the other hand might not give you great returns, but it gives you certain returns that are above what you return will be from cash (well, easy to beat 0%). If you seriously believe that the gov might go bust, neither cash nor treasury bonds are a good pick, something physical might make more sense (like, ahhh, real estate).

Finally, don't look at 12 month periods for your long term savings. This is going to sit there for a long time. Look at the return for 10 year periods and longer. Even in a moment as bad as now you'll have a better return than cash. If you have time to wait a bit (and you should, wealth in equity should never be wealth you might need urgently) it will most likely look much better.
davidacoder
Tuesday, October 7, 2008 5:57:27 PM (GMT Daylight Time, UTC+01:00)
My 401k says:
Personal Rate of Return from 01/01/2008 to 10/06/2008 is -8.3%

My strategy was to be heavily in bonds for the year.
josh
Tuesday, October 7, 2008 6:10:10 PM (GMT Daylight Time, UTC+01:00)
Certificates of Deposit (CDa) pay out 2% or so and are better than cash under the mattress, at least if your house burns down you still have it available
Whoever is scared about banks going bust, put it in chunks of 100K in different banks
Tuesday, October 7, 2008 6:12:04 PM (GMT Daylight Time, UTC+01:00)
hahaha, I didn't even notice the now playing part

Now Playing: Abba - Money, Money, Money
Tuesday, October 7, 2008 6:59:58 PM (GMT Daylight Time, UTC+01:00)
The problem with moving things around like that is you can never predict when things will move back up. That first growth is dramatic and pretty valuable.

If your planning on tapping your 401(k), sacrificing growth for security is a good idea. If your decades away, your loosing out on a lot of money. As bad as the great depression was, anyone who rode it out did fairly well just a decade after. If you pulled out, you lost a few % a year to inflation, and missed a lot of the recovery growth.

Hence the age old advice is to diversify based on how soon you need the funds. If it's long term, pick more stocks, since you can wait out recessions... if it's short term, move to bonds and other more secure assets.
Tuesday, October 7, 2008 11:54:32 PM (GMT Daylight Time, UTC+01:00)
Unless you're going to need the money in say less than ten years, it makes no sense to have a huge portion of your savings/investments in cash. In fact market crashes create an opportunity to buy equities at bargain prices and should be taken as a blessing by long term investors, not the other way around. The right way to lower your risk is not by selling when prices are falling, but by picking a sound asset allocation and sticking to it in good times or bad. I highly recommend reading "A Random Walk Down Wall Street".
triple-dot
Wednesday, October 8, 2008 6:35:58 AM (GMT Daylight Time, UTC+01:00)
Well today you and I lost another 5%.
Wednesday, October 8, 2008 9:13:34 PM (GMT Daylight Time, UTC+01:00)
Note that I definitely *don't* advise converting your holdings to cash right now. Especially not for 401k. For 401k, anyone who can afford to forgo the money should be contributing the maximum and putting it into a no load index fund. Every dollar today buys 30% more shares than it did last year, which is a big deal for you when the market recovers (even if it's 10 years from now).

I got lucky in cashing out last year, but I wouldn't do it now. Things could get a lot worse in the short-term (or not), and there will be volatility over the next couple of years, but shockingly the rest of the world is screwed worse than the U.S. (even if it's the U.S. fault).

I am maintaining the same savings rate right now and plowing half into cash and half into index funds.

Regarding davidacoder's point, it seems that the economists are now worried about *deflation*. Housing prices and commodities prices have both plummeted, and we're pretty much guaranteed to have a global recession for some time to come. During a recession you should keep saving (since it builds character), and invest in your skills and health, since those are way more valuable than cash.
Thursday, October 9, 2008 9:14:01 AM (GMT Daylight Time, UTC+01:00)
@Joshua: Deflation? Really? I read a lot of econ blogs these days, and old sorts of wild speculation come up there, but I haven't read about that one.

Still, I'd be interested about your savings approach. I am totally with you about index funds, but why cash?!? At all? Why not buy some sort of treasury security instead? Cash and treasury securities seem to have exactly the same risk (in particular, the only risk with treasury securities is the gov going bust, and there seems a 100% correlation of that event with cash being worthless), but with treasury securities you get a return whereas with cash you don't. Is there any reason to save in cash?!? Now, if you expect very short term liquidity needs for yourself, maybe, but even then there are short running treasury securities that would be a better pick. Just keep in mind that with cash you have by definition a negative real rate of return, i.e. you will loose wealth guaranteed.
davidacoder
Friday, October 10, 2008 3:26:43 AM (GMT Daylight Time, UTC+01:00)
"It's Money in the Mattress Time"
which currency should i choose to put in the mattres? :)
ace
Monday, October 13, 2008 6:53:57 PM (GMT Daylight Time, UTC+01:00)
davidacoder: Yields on treasury are so low that the question is "is there any reason to invest in treasuries"? Dare's title for this post was a quote from Buffet, who was observing that treasuries today are no different from money under the mattress. Having said that, I'm definitely plowing into index fund now, whereas I was totally out last November. I have reason to believe the problems will be fixed (eventually) now, while last November it was clear that nobody was willing to address the problems.
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