Investing Strategy Review – Retirement Accounts and Timing the Market
October 28, 2008
When I wrote about investing in the stock market last week I raised some questions from people about whether we were getting out of the market and trying to time the market. I thought I’d address those questions so that I don’t give the wrong impression.
Retirement Accounts
Basically what I did was pretty much stop contributing to our retirement accounts other than putting enough in the 401k to get the match. Why? The vast majority of our net worth is in our 401k, 403b, and IRA’s; accounts that we can’t touch for a loooong time. I know, that’s the whole point of the retirement plan structure, using tax breaks and early withdrawal penalties to incent us to keep the money growing for retirement.
We’ve definitely taken advantage of these tax breaks since we began our careers, maxing out our investments to my 401k, my wife’s 403b, and our IRAs over a period of about eight years. I’ve often thought that we should invest some of that money in non-retirement accounts but I’ve never acted on it. One of my weaknesses is that if I’m unsure of a major decision I can postpone taking action on it for a long time.
Finally I decided it was time to invest our money outside our retirement accounts and to prevent further delay on the decision I went in one night and stopped the automatic contributions to all but 3% for the 401k. That money instead went into our ING Direct savings account while I decided where and how to invest it. Will we restart our retirement savings again? Yes, I haven’t decided yet when that will be but it will definitely happen.
Stock Market Crash
As I allowed myself to become distracted over the following months with a new job and a new baby on the way, things took a turn for the worse in the financial markets. Stock prices dropped like the country hasn’t seen for a long time so instead of opening a brokerage account, I opened an account with FNBO Direct and earned 3.5% on the cash.
Then about two weeks ago I decided that stock prices and P/E ratios had fallen low enough that I was missing out on the “buy low” opportunity. I opened an account with Zecco and transferred over a big chunk of money. I’ve been taking advantage of their unlimited free trades this month and have been investing money into the markets every day. They’re going up and down but I’m “dollar cost averaging” the money in so that I don’t dump it all in just to see it all drop big time the next day.
Buying Low
I didn’t want to give the impression that we’re no longer investing our money for the long term or that we’re out of the market. We’re covering our living expenses and have built up a sufficient emergency fund, the remainder of our money is being invested for long term growth.
So, was this market timing? Yes. Do I advocate and regularly participate in the practice of trying to guess what the market will do and trying to time my investments based on that? No. Until this case, ever since we became investors, our money has gone into the markets twice a month on a regular basis, every time we received a paycheck.
This was simply a case of me changing investment strategies and getting side-tracked on making a decision. While I was in delay mode, the markets tanked so we were spared the loss, at least temporarily, of the money I would have invested in August, Sept, and the first part of October. Now it’s going back into the market and I’m hopeful that over the long term we’ll look back on this as buying stocks at a bargain.
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I understand on what you are trying to do in regards to life changing events, the stock market reaction, and the need for liquidity, but cutting your retirement back (i’m guessing dramatically) shouldn’t be an option in the first place. Retirement funding should be a set & forget concept. In other words you set the amount you will contribute to your retirement and keep it at that.
From what I took about you maxing out your retirement accounts, it sounds as if you were aggressively funding your retirement, but a little too aggressive, to where there was no real balance in the first place. Much like someone who is aggressively frugal and starving themselves from some fun things money can buy, will eventually break down and splurge on themselves. Because you were aggressively saving for retirement, you felt it was ‘ok’ to cut retirement dramatically.
I personally believe you should set an amount to contribute to your retirement and stick with it. Don’t make it too aggressive, and don’t make it too little, but make it and stick with it.
But meh, it’s your money, do what feels right to you, money is meant to be eventually spent.
Just my two cents.
I’m a firm believer in NOT having everything tied up in retirement accounts. I’m comfortable where I am with my IRA’s, PERS, 401K, pension, etc. and continue to contribute.
However, what if I want to retire early without the tax penalties of early withdrawals? Which I plan on. I have to be 59.5 yrs old to withdraw without penalties on some of the above.
Therefore, I have a lot just in a regular diversified portfolio, rather conservative stuff, but investments nonetheless. No penalties for instant use of the $$ if I want it out. Being able to get to this money also came in handy when the little addition to the house went overbudget due to unexpected foundation problems!
I think you did make a smart move. People (or so-called financial advisors) talking about dollar cost averaging and regular contribution to 401K just keep repeating their parrot like instruction that they memorized. With almost no liquidity in the 401k plan it makes sense for you to limit your 401K contribution just to get the match and invest it in a more liquid market such as CDs or even bonds that guarantee a fixed return.
If someone who had invested in DOW since 1970 has to retire today, they would have got a meager 5-6% return on their money Vs long term bonds which would have given them a guaranteed upwards of 6-8%. The tax benefits of the 401K plan is over stated often. I feel it is a big price to pay for liquidity or the lack of.
I contribute 12% to my 401K and now I am going to cut it by half and start diverting that money to Vanguard market index or target retirement funds. With the DOW heading towards 7000-, I feel it will be a great investment rather than locking my money in a 401K.