401K Loss: What Am I Doing Wrong?

October 30, 2011, By Mark Meissner 2 comments

My cousin recently contacted me about his latest 401k statement. He was concerned that the value of his investments had dropped by 30%. He believed he wasn't knowledgeable enough about investing, and as a result was losing hard-earned money. I told him that whatever you do, don't go moving your money out of stocks in favor of less risky investments like money markets or bonds, especially if you've already taken the hit in your 401k—you're screwing yourself out of the bounce back that will inevitably occur.

I have many clients who, like my cousin, freak out when they see their 401k statements. Let's take a look at the situation to assess priorities and, with hope, help you sleep easier at night. 

First question: What is your investment horizon? In other words, how long will you be investing? It all starts with determining how much money you are going to need to retire and at what age will you need the money. Because most of my clients and readers of my blog are under 50, I would say don't worry about post-retirement now. Invest as much as you can possibly put away and live frugally. Don't make investing and retirement planning any more difficult than necessary.

In another article I will go into further detail on how to determine how much you will need for retirement and how to figure out what it will take to achieve that number. For now, let's get back to my cousin, who is nearing 30 and just began investing a couple of years ago. He will be investing for at least another 30 years, more realistically another 40 years or more.

Markets are constantly fluctuating, with major ups and downs every decade. Realize that over the long term, the market has historically appreciated (gained value) at around 8-10% per year since the markets opened over 80 years ago. Over the short term, markets plunge sometimes as much as 50% or more, simply to rebound within a year or two, ultimately resulting in gains if you remain committed.

Many would argue that you actually benefit from these steep declines because you're able to buy more stock at lower prices, and when the market rebounds you'll have significant gains. Just look at what happened a couple of years ago—the market plunged from a Dow slightly over 14,000 to just over 6,000 in a six-month period to rebound to its current level of around 11,500 (it was up to 12,800 this past April). The folks who dumped their stocks took the losses and got out, while those who stayed committed recouped much of their money.