Why You Should Always Be Ready for a Big, Scary Stock Market Sell-Off
Here’s how I normally deal with sell-offs:
1) I don’t look at the 401(K) balance. It’s not going to do me any good to do so because it’s not going to change our strategy.
2) I think of all the additional shares we are going to be able to buy at lower prices. Think of the sell-off as a giant SALE!!!!
3) I increase the contribution amount if possible. We are contributing the maximum now, so we won’t be able to do that.
According to the latest Vanguard “How People Save” report, the average 401(K) balance is $96,000, while the median account balance is $26,405 (median age of participant is 46).
This does not bode well for the future of America’s retirees.
“Experts” suggest saving at least 10% of income. If you can’t do that, you should save as much as you can and increase it 1% per year until you hit your goal.
My advice: START AS SOON AS YOU CAN! The one thing you can never get back is time.
I found this tidbit from John Cassidy’s latest column in Fortune to be interesting:
“A couple of months ago I mentioned the cyclically adjusted price/earnings (CAPE) ratio, which was flashing amber. Another warning sign is provided by the so-called Q ratio, which compares the market value of corporate assets with their replacement cost, and which was developed by the late James Tobin, a Yale economist. As of March 6, when the S&P 500 closed at 1,877, the Q ratio was indicating that the market was overvalued by 76%, says Andrew Smithers, a London-based analyst who helped popularize the measure. The only times the market has been more overvalued with the late 1920s in the late 1990s.”
My wife and I are still in the accumulation phase and I’m not one to time to try to time the market. If the market comes crashing down, I simply won’t look at the 401(K) balance for a few months. Ignorance is bliss.
A friend of mine gave me her 401(k) information to look at. Her company changed 401(k) providers and went with Nationwide. I wasn’t fond of their previous 401(k) provider (I forget the name now), so I was happy to see a change.
I flipped through the information packet and landed on the page listing their options. I was pleased to see companies like DFA, Vanguard, American Century, etc. Expense ratios for the funds were fairly low too (the highest was 1.21% for a SmallCap value fund).
Then I turned the page…
IN ADDITION to the mutual fund expenses, Nationwide tacked on an additional annual management fee ranging from 1.02% to 1.27%.
So…the Vanguard Index 500 Signal Class, with a .05% management fee, now had a 1.32% annual fee! FOR AN INDEX FUND!!!!!
Now, I know why companies do this. Small companies are struggling. Health insurance premiums are going up. Gas is expensive. So, a broker or advisor comes along and offers a 401(k) plan that is really cheap to the business owner and the costs to the employees are either glossed over or buried in the information. Sadly, most employees don’t have a clue.
To give you an idea of the impact of a 1.27% additional fee, I ran some numbers. I assumed an employee socking away $10,000 per year in the S&P 500. Using monthly returns, I calculated that at the end of 10 years (2003 – 2012), the 1.27% annual fee would have lead to a loss of $8,800 to fees (you can see my numbers here). That’s a sizable chunk of change.
My advice would be to only invest enough to get any company match and then max out a Roth IRA (assuming you qualify) or a traditional non-deductible IRA. There is no sense in throwing away money due to useless fees.
We have had a good year so far in the stock market.
So, curious minds want to know…
What is your personal rate of return for 2013?
Our personal rate of return through yesterday is 16%.
We are 100% stocks:
I am not recommending this route to AFM readers. It can make for a very volatile portfolio with pretty big swings. Beware.
From today’s WSJ
Fifty-seven percent of U.S. workers surveyed reported less than $25,000 in total household savings and investments excluding their homes, according to a report to be released Tuesday by the Employee Benefit Research Institute. Only 49% reported having so little money saved in 2008.
I found the report and thought this graphic that breaks down savings by age group was troubling:
Only 42% of those 55 and over have a $100,000 or more in retirement savings. Wow! What kind of retirement, if any, can they (or the other 58%) plan on having?
Even worse is the fact that a lot of people have no idea how much they will need during retirement. Here is a quote from one part of the report:
Forty percent of all workers think they need to accumulate at least $500,000 by the time they retire to live comfortably in retirement. Twenty-one percent feel they need between $250,000 and $499,999, while 29 percent think they need to save less than $250,000 for a comfortable retirement…
A lump sum of $250,000 placed in a 20-year fixed immediate annuity with a 3% to 5% interest rate, will produce an annual income of $16,000 and $19,000. Even combined with social security income, that’s hardly a comfortable retirement.
A friend of mine asked me to help her allocate her 401(k) contributions.
Here are her choices (click on the graphic to see a PDF version):
As you can see, they’re all expensive choices. I’m sure this is because it’s a small company and one of the ways providers make the plan “cheaper” for employers is by giving the employees higher-cost choices. Unfortunately, a lot of employers don’t have the time or the desire to research their options.
These plans are more often sold than bought.