These are extraordinary times for 401k participants. Economics around the world are experiencing one of the most challenging and troubling time periods ever. The market’s decline has been swift and dramatic. What should you do with your 401k? Should you continue making contributions? Where should you be investing those resources? If you have been in equities, should you pull out now?
Emotions are running high. History has shown that whether times are good or bad, emotions can drive individuals into making decisions that are detrimental to their long-term goals. You do not want to follow the herd. Fear of loss is greater than the desire for gain. That is one reason why drops in the market can be so dramatic. Making decisions based on overconfidence, pride or fear is not the solution.
What should you do? You, first, should continue making your 401k contributions. Many 401k plans have an employer match. If you cut your contribution, not only will you put less money in your 401k, so will your employer. Also remember that the reason you are making these contributions in the first place, is to fund your retirement in later years. If you still have that need or goal, continue making those contributions. Lastly, your
contributions are made with pre-tax dollars and grow tax-deferred.
How you should invest your 401k fund will depend on a number of factors. These include: current age, age of retirement, risk attitudes, amount of funds available, etc. There is no simple answer. Spend some time with your financial advisor going over all these issues and more. Together, you can build a 401k retirement investment strategy that is custom made for you.
If your 401k is invested in equities and you are wondering when the market will turn around, there is no way of knowing. The study of past economic crises might provide some perspective. History shows that there have been a number of striking declines and advances in the past. Looking at every point where the market returned less than 2.5% over a ten-year period of time (now we are at a negative return), it then returned 13.3% per year over the next 10 years, with a range of return of 7.1% to 18.6%. Of course,
historical results are not predictive of future returns.
There is an old saying that it is always darkest before the dawn. This holds true to the equity market as well. On June 1, 1932, the market was at its depression era low. Three months later, the S&P 500 increased 18.73%. After one year, the S&P 500 median increase was 45.46%. In April 1942, we were at war and we were losing. The Pearl Harbor attack had crippled our Pacific fleet. Germany had taken France, and inflation was rampant. Companies faced wage and price controls and excess profit taxes. In that
same month, with no clear reason, the market hit bottom and started to rise. By the end of June 1943, the Dow Jones Industrial average had gained 54%.
Some 401k participants are taking “in-service rollovers” of 401k assets into their IRA, where they have greater investment opportunities. Many do this to invest in annuity contracts issued by life insurance companies that provide a guaranteed rate of return. A word of caution: the guarantee is only as good as the company issuing it. Additionally, there are other costs that may be involved. Make sure to carefully review all costs and pertinent information before making any decisions. Whether you are entitled to make
an “in-service rollover” depends on your plan document.
During these difficult times, it makes sense to have a complete review of your 401k. Contact your Money Concepts financial advisor for help.
While we wait for the economy to improve, there are steps you should consider so you can gain control of your financial recovery. Account values are much lower than this point last year. Many of us now find ourselves with a wealth gap. What do you have in place to cover the drop in value of your accounts should something happen to you or your spouse? Now is the time to find out. How?
Start by having a financial advisor work with you on your financial plan. You need, and deserve, someone who will look at your total financial picture and put together strategies that first protect you from further risk, and second, get you into position for the economic recovery. This takes a holistic approach that goes way beyond just portfolio management. The relationship I am talking about is an ongoing coaching and money-mentoring relationship. One where you have someone you can count on in good times and bad. Someone who will work with you to insure that you take advantage of the opportunities, and protect you from the dangers the future presents.
To protect you against potential dangers, get an analysis on all your existing life insurance policies from a Money Concepts’ advisor. Often, people have a number of life insurance policies purchased years ago with old rates. By consolidating those old policies into a new policy with a lower rate, you may be able to increase your coverage without increasing your premium. Many people are able to increase their coverage by 40% to 50%.
Another issue that can make matters worse is the need for long-term care, either at home or at a facility. With account values low, many people are looking at long-term care insurance as an important part of their personal economic recovery program. The average long-term care insurance premiums range from $200 to $400 per month. The premium is determined by a number of factors including your current age and the type of coverage requested. You can purchase types of plans that offer the option for a managed care facility and/or home healthcare.
A cost-benefit analysis usually shows that it is well worth the money. Under today’s circumstances, with lower account values, it makes it all the more important. Those without it risk using up all their assets while creating a burden on family members.
Do not count on the government for help. While the State’s Medicaid program provides a safety net, you are required to first use up yours and your spouse’s funds before they provide any assistance.
* What is your wealth gap?
* Have you had those policies reviewed?
* Do you have long-term care insurance?
* What does it cover?
* Are the costs reasonable?
These are all the questions you should review with your Money Concepts advisor. Give them a call today to get the answers to these questions and more.
Bear markets try our soul. They hurt. This one is no different. The S&P 500 dropped 37% in 2008, the third worst performance ever. With such aloss, it is natural to feel nervous. But cashing out now may not be the best option. History tells us that the longer the depth and the duration of the fall is, the greater the subsequent rebound is. In other words, what goes down may go back up.
The economic reports continue to issue gloom and doom so why should anyone hold on to hope now? Well, this is not America’s first bear market. Since 1926, there have been 13 bear markets, averaging one every 6 years. This current bear market is the 3rd worst after the one that ended in 1932 and 1942, respectfully.
During this recession, fear and panic over credit issues took its toll on virtually all stocks. This means that the current prices for quality companies have been severely discounted. I have had the opportunity to talk to a number of different money managers of late. The one common refrain is that there are real bargains in stocks.
Look at valuations today, and you may come to the same conclusion. The Price Earnings Ratio (P/E ratio) is under 10, down from 28 only a short time ago. [P/E ratio is a measure of the price paid for a share of stock relative to the companies’ earnings.] The long-term P/E ratio since 1930 is 17.2. History indicates that when you can buy stocks at low P/E ratios, that leads to better stock market returns and vice versa.
So is now the time to invest more into equities? No one knows when the bear market will bottom. Perhaps it has already. To help nervous investors move a portion of their portfolio back into stocks, many advisors recommend a strategy called dollar-cost averaging*. In this strategy, you buy a fixed dollar amount of investments on a regular basis. If the market falls further, you would be buying additional shares at the lower price. When the market recovers, your shares go up in value. The downside to this strategy is if the market recovers while most of your money is still in cash collecting little to no income. Still, it is better to have some in the market during a recovery rather than none. Talk to your financial advisor before starting any dollar cost averaging program.
What we do know is that the stock market is one of the best leading indicators for the economy. Investors anticipating an economic recovery in the near future will invest in advance. If you look at eight of the last eleven bear markets, the stock market bottomed about half way through the recession. The stock market actually rose about 25 percent before the recession ended and even more afterwards. Let’s be clear… a bull market usually begins during a recession. The 1932 bull market rose 367% over the next five years.
Long-term investing in stocks takes patience. Bull and bear cycles occur. Unfortunately, market timing is notoriously difficult to predict. No one really knows the best time to buy or sell. But, once again, history can be helpful. If you had invested $1 in stock in 1925, it would be worth $2,020 today or about a 9.6% return per year. One dollar invested in U.S. government bonds would equal $84 today or 5.5%. One dollar in cash would be $21 today or 3.7% per year. During that same period of time, inflation
averaged 3 percent per year.
This clearly shows the trade-off between risk and return. Viewed from a large time-frame, even the great depression looks like just a small bump along the way. But even if you look shorter term, say 5 to 10 years, you are almost always better off with stocks making up part of your portfolio.
The cardinal rule of investing is diversification. When buying stocks, diversify by industry, style, country, etc. Also, invest in different asset classes. Bonds, commercial real estate, stocks and cash. If you look carefully at 2008, you will discover industries such as consumer staples, health care, and utilities, while all down, still outperformed the overall market. At the other end of the spectrum, the cyclical and credit-sensitive industries underperformed the market as a whole.
The table may turn when the bull market starts. Investors may flock to the oversold cyclical and credit-sensitive industries, shunning the more defensive industries. That is why diversification is so important. There is an ebb and flow to the market. By having a diversified portfolio you help, somewhat, smooth out the rough patches.
Today it is all about cash. The total amount of cash sitting idle is at historic levels. It is estimated that the amount of cash is equal to $8.9 trillion. Compare that to the S&P 500 that was worth $7.2 trillion as of the end of January. As I mentioned earlier, money managers are finding bargains. What they need is cash to make the purchases.
All that is needed now is for our economic condition to show some signs of abating. As that occurs, more and more investors will move back to stocks starting the bull market. It is not a question of if, but more of question of when.
Now is the best time to get yourself prepared for your own personal Economic Recovery. Review your total portfolio and ask yourself these questions:
* How much do you need for current income?
* How much for growth and income?
* What about preservation of capital?
* How much should be invested for long-term growth?
* Is your current portfolio using the right strategies?
Get the answers you need and deserve. I urge you to meet with your
*Dollar-cost averaging involves continuous investment in securities regardless of fluctuating price levels of such securities. The investor should consider his/her financial ability to continue his/her purchases through periods of low price levels.
On December 23, 2008, the President signed the Worker, Retiree, and Employer Recovery Act of 2008 (the Act) into law. Section 201 of the Act waives any required minimum distribution (RMD) for 2009 from retirement plans that hold each participant’s benefit in an individual account, such as 401(k) plans and 403(b) plans, and certain 457(b) plans. The Act also waives any RMD’s for 2009 from an Individual Retirement Arrangement (IRA).
The Act does not waive any 2008 RMD’s, even for individuals who were eligible and chose to delay taking their 2008 RMD until April 1, 2009. These individuals must still take their full 2008 RMD by April 1, 2009, or they might face a 50% excise tax on the amount not withdrawn. The 2009 RMD waiver under the Act does apply to individuals who may be eligible to postpone taking their 2009 RMD until April 1, 2010. However, the Act does not waive any RMD’s for 2010. For additional information on rollovers and calculating the taxable portion of your withdrawal or distribution, click on the IRS Publication links on the left.
If a beneficiary is receiving distributions over a 5-year period, he or she can now waive the distribution for 2009, effectively taking distributions over a 6-year rather than a 5-year period.
The bottom line is that you, or your loved ones, have a few options when taking your RMD’s for 2009:
- Take your RMD, and pay taxes on the distribution.
- Send your RMD to a charity of your choice, and not pay taxes on your distribution.
- Not take your RMD.
If you would like to take advantage of this new law, please contact us ASAP. We can help guide you through the new law and the tax consequences for you and your family.
Bernard Madoff ran the biggest “Ponzi scheme” in history. He stole billions of dollars from well-healed investors, institutions and charities. His malfeasance went undetected for years. How did this happen? How do you make sure it does not happen to you?
Mr. Madoff was a long-time Wall Street insider and former chairman of the Nasdaq stock market who used his status to bilk investors. He claimed he had a unique investment system involving options (puts, calls and collars) that consistently produced amazingly high returns that beat the market. In fact, he was simply using new money to pay off liquidations while he swindled the rest. He used phony, mocked up statements and returns to fool investors.
Mr. Madoff’s Ponzi scheme was easier to commit because of the lax rules involving “accredited investors”. These investors included wealthy individuals, institutional investors, charities, foundations, banks and other hedge funds. The law considers these investors to be sophisticated enough to make investment decisions without the same amount of disclosures, filings and protections provided to the rest of us. This often works in the accredited investor’s favor. They are able to get into deals we can’t. The lower filing and administrative costs associated with these deals are usually passed along to the accredited investors. But this time, it backfired. Mr. Madoff’s hedge fund was all smoke and mirrors.
Hedge funds are private investment pools for accredited investors. Since investors are accredited, the hedge fund manager is not required to follow any investment strategy nor are they prohibited from using any specific investment. Hedge fund managers do not have to answer to a board of directors. They are literally the “wild west” of investments. The management fee starts at 2% and goes up to 30% on a performance-based. The disclosure and reporting requirements are far less than traditional investment vehicles, like Mutual Funds, Unit Trusts, and Variable Annuities. In this case, Mr. Madoff used his connections to entice other hedge fund managers to put part of their funds in his hedge fund. So it went until it all exploded in December.
Six Safety Measures
First – Never give custody of your assets to an investment professional. Insist on using a third party custodian. At Money Concepts, we use Pershing, LLC (a subsidiary of Bank of New York Mellon) and/or Fidelity Investments. They hold all clients’ accounts. They maintain all books and records for the client. They are also responsible for sending out confirmation and statements. Any fund withdrawal must be directed to the custodian and sent to the client’s address of record.
Second – Take advantage of the regulations and security laws that are in place to protect you. There are a myriad of investment choices available. Use the investment vehicles that are covered by these regulations.
Third – Understand what you are investing in… if it sounds too good to be true it probably is. If your investment advisor can’t explain it, don’t buy it! Investing is tough enough. Good quality investment programs go down in a bear market. Don’t be fooled by someone selling easy returns or “pie in the sky” type numbers.
Fourth – Review any prospectus carefully. If the investment does not “require” a prospectus or has a “limited prospectus”, RUN, don’t walk.
Fifth – Always use more than one money manager. Any investment advisor worth their salt has a multitude of good money managers to choose from. He or she should work with you to put together a “team of money managers” to handle your accounts.
Six – Communicate with your advisor before, during and after investing. Making an investment decision is just the start. Good, open communication can help you make better, more informed decisions in the future.