Monday, October 6, 2008

It's Official - I'm Losing Money in My 401k

I really hate to start off the week with a downer post but here goes. Since 2001, I've contributed $86,208.64 to my 401k (including my company match). The current value of my 401k is $85,762.41, or -0.52% total return/-0.14% annualized return.

Up until now, I haven't lost any of my contributions. But now that it's fallen below my total contribution amount, I'm feeling a little bit queasy in my stomach.

In my prior post, I discussed the reasoning behind my current 401k target allocations which are:

Investment Fund (Classification)Target %
DODFX (Int'l Multi-Cap Value)20%
DODGX (US Large-Cap Value)20%
BTIIX (S&P500 Index)20%
NBGEX (Small-Cap Blend)20%
PTRAX (Intermediate Term Bond)15%
MLTXX (US Treasury Fund)5%

Based upon my target allocation, I should have 80% in equity funds, 15% in bond funds and 5% in Treasury funds.

But now, my allocations look like:

I'm going to reiterate that I'm not going to do anything other than to realign my investments to match my target allocations at the end of the year, if necessary.

But here's where I need to do a serious gut check: I am anticipating a long-term (i.e., 10-year to 20-year) stagnation or worse, a downward trend in the market. The current market crisis is caused by over-leveraging and excessive risk-taking by both individuals and businesses. When access to easy money gets cut off, the ability to invest also declines. The recent passage of the $700 billion bailout "rescue" plan will theoretically unclog the liquidity problem in the credit market, but it does not address the deleveraging process that needs to take place in the underlying market.

In this Los Angeles Times article, Harry Holzer, a labor economist at Georgetown University and a fellow at the Urban Institute commented, "[T]here's a good chance this [recession] will be more severe than [in 1990 and 2000, which lasted 8 months], because the last two were not accompanied by the widespread financial crisis that we have now."

This Marketwatch article validates my worries as well. The article argues that the Investment Rate measures the demands for investments over long-term cycles and thus forecasts future market cycles.

The article states:
[I]f demand is increasing over extended periods of time, over the course of many years, we could rationally assume that the market and the economy will fare well. In fact, this has been the case since 1981. Every year, between 1981 and 2007 the demand for investments increased annually. More people had money to invest, and reason to invest it at the same time. During that upward sloping cycle in the Investment Rate market declines and economic downturns were short lived, buy-and-hold strategies worked extremely well for passive investors, and buying the dips made sense religiously. This was true during every major down cycle, including the "crash" of 1987.

However, at the end of 2007 the upward sloping cycle which began in 1981 came to an end. A new era began at the end of 2007, an era representing diminishing demand for investments going forward. The Investment Rate identified this in 2002, when it was first offered to the public.


The declines that began at the end of 2007 relate directly to the Great Depression and the Stagflation period of the 1970s because, in all three instances, overall demand for investments on a consumer level was shrinking. The average duration of a major down cycle is 11 years.

The third major down period in history has only just begun.

I am wondering: If this is true, can I really stick to my current plan over the course of 10+ years of diminishing returns? I realize that this is how fortunes are made. In the famous words of Warren Buffet: "Be greedy when people are fearful and be fearful when people are greedy."

During this time, though, I wonder what kind of psychological toll this will take on me?


Skittl1321 said...

The way I look at my 403b (no 401k b/c it's a not for profit) is that I haven't lost any of MY money- just the company's money. The value of my 403b is lower then the total I have put in + the company match, but no where near lower then the total I've put in. Since you have a company match- it's likely the same case for you, though I admit my company is more generous in their match then many I've seen.

I just have to keep thinking "buying on sale..." I really do think over time, it will even out.

Anonymous said...

Not to depress you more but if you figure in the dollar's dramatic drop in value and buying have lost more than just what you might think....

Don't worry. I am in the same situation and it stinks. The Fat Cats are harvesting the money before the next administration comes in and our 401K is the crop....

Shtinkykat said...

skittl1321: I agree that since about 20% of my contributions come from the company match, I'm still ahead. I agree that I need to have the courage to "buy on sale".

anonymous: Speaking of Fat Cats, did you read how Lehman's executives were securing their bonuses as they were begging the Fed to bail them out? Fuld even joked that people who suggested that the executives forego their bonuses were somehow under the influence. Disgusting.

SavingDiva said...

It is so frustrating to look at my decreasing investments...especially because I can't afford to add any money to them...