Pimp Your Finances

“This planet has – or rather had – a problem, which was this: most of the people living on it were unhappy for pretty much most of the time.  Many solutions were suggested for this problem, but most of these were largely concerned with the movement of small green pieces of paper, which was odd because on the whole it wasn’t the small green pieces of paper that were unhappy.”
- Hitchhiker’s Guide to the Galaxy

What am I going to do about the stock market?  I’m going to take the advice of Douglas Adams, and not panic.

I’ve been very hesitant to check my 401K recently, partially because I knew it would be bad, but also because I know that I’m investing for the long term.  The crashing stock market just means I’m buying the same funds I normally buy, only at a 25% (or more) discount.

But curiosity finally got the better of me, so I’ve been checking my returns several times a week recently.  The result?  I’ve lost 43% year-to-date.  But I’m not worried.  In fact, I’m actually buying more stocks.  Here’s why.

I’m investing for the long term.  I know that the stock market will eventually recover, and thanks to the wonders of dollar cost averaging, I’ll be up significantly when the market eventually starts increasing again.

I have faith that the financial system isn’t going to collapse.  If it does, we’ve all got a lot bigger problems than our retirement, because that means that the country is probably in a state of chaos and martial law.  Again, I just don’t see that happening.  If you do, then you’re probably better reading www.survivalblog.com instead of finance sites.

But regardless, 43% looks bad.  And it is, but I wanted to try to give that number some context.  First, I looked at the sum of deposits in my 401K, both from myself and my employer: $13,048.  Then, I looked at the present value of my 401K as of closing today: $9315.27.  That means that over the history of my 401K, I’ve lost 28.6%.  Still bad, but not nearly as bad as 43%.

After that, I took it a step further.  I divided the present value by the sum of my personal deposits.  The number: 165.9%.  Yes.  That’s right.  Right now, I have a profit of 65.9% on my investments.  So even with the market spiraling out of control, I’m still getting an incredible rate of return on my money.  I know that employer match programs vary, but if you have any such program available to you, it’s probably best for you to take advantage of it.

Still, I’ll admit that I’ve been tempted to change my higher risk investing strategy.  Then reason got the better of me, and I decided to stay the course.  When I chose my investments, I chose them carefully, looking at ten year returns, expense ratios, and Morningstar ratings.  That logic hasn’t changed.  It’s hard to stay on a losing path, but I realize that when the market recovers, I’ll be making above average gains, just like I’m having below average returns now.

I have only made one change in my plan: to invest more in stocks.  I had been investing in about 5% bonds, because that number tends to yield just as good of results as investing 100% in stocks, but with a lot less risk and volatility.  But the week before last, I moved my money – 7% of my portfolio – from bonds to a very low expense (.03%) S&P 500 index fund.  I also changed my future contributions in a similar manner.  Please note – such an aggressive strategy is not for everyone.  All I’m trying to say is that now is not the time to abandon stocks.  If anything, now is a good time to invest more in them.

My reasoning is that the market is down significantly.  It may not have bottomed yet, but I’m posetive that the market will recover.  Even if it continues to go down, it won’t stay this low in the long run.  It was below 9000 when I changed my strategy, and closed above 9600 today. 

I don’t believe in timing the market, but If I want to take advantage of this temporary downturn, I need to be in stocks – not bonds.  It may take some time, and cause even more short term losses, but I’m posetive that this will be a decision that pays off eventually.  After all, I do have 30+ years before retirement.