Image by scottwills via Flickr

I wanted to go back on something I posted a few posts ago.  You probably SHOULD keep investing in a 401(K) or other retirement plan, at least up to the company match, if you are lucky enough to get one.  The danger is in continuing to put your hard earned dollars into this market through some kind of standard index mutual fund.

My co-worker argues with me: Oh, it’s dollar cost averaging!  We’re buying on sale! It’s OK to lose, because I have a 20 year time horizon!!  What a bunch of Bull!   Why should you lose two years or more worth of increases of any kind, and actually take a loss?Then, take the next two years after that, or longer God forbid, to get back to where your balances equal just your inital investment?

Dollar cost averaging is for dupes! It’s to make you believe it’s EASY to manage your own retirement, so that your employer doesn’t have to feel guilty about not offering any kind of fixed retirement plan any more.  Meanwhile, you will LOSE 4 years of any return at all, plus principal, if you are just following the “conventional wisdom”.

Investments experts are not “dollar cost averaging”.  They are sitting on the sidelines with their cash. The are investing in short ETFs, currencies, and corporate bonds, all of which you likely have NO access to in your 401K.  Only the dupes keep “buying” stocks at these crappy levels, because they haven’t taken the time to learn something and stop their contribution from going into the same old index fund.  OF COURSE Wall Street is telling you to keep contributing, so they have someone to SELL TO.

So, put your $$ into your retirement fund, up to the company match, to keep saving, but keep it in the government bond fund or the savings account fund. What the heck, why not EARN 3% instead of LOSING 20%.  Then in 2 years when the market slowly creeps back, THEN switch your allocations.  For everything you want to save beyond your company match, set up a self-directed ROTH.  Put as much as you can in there.  And LEARN how to invest, find other vehicles that are actually making money (they are out there).  Otherwise, you’re just throwing it away.

Image via Wikipedia

The first time I read about the problems inherent in 401(K)s, it was reading Rich Dad’s Guide To Investing by Robert Kiyosaki.  Whatever else you think of him, his discussions of how the tax laws were written and rewritten to benefit the rich and not the middle or lower classes are invaluable, as well as his concern over why 401(k)s don’t work for the vast majority of people.  (Pick it up for a couple bucks used, and while you’re at it read Rich Dad’s Prophecy too for a real hair raiser…)

Here is an article today in the Washington Post saying the same thing, (although where were these articles  five, six ten years ago…)

Jim Cramer too has ALWAYS said to only put into your retirement account what your employer matches.  Beyond that, use a ROTH or some other self-managed vehicle where you can invest in individual stocks, bonds, CDs or investmetns that YOU control, not the ubiquitous index fund or “diversified” global funds.

You may argue with some of the recommendations of these writters, but the underlying logic makes sense, and is borne out by the results in the real world for the vast  majority of people.  It’s worth taking a step back and looking at the big picture.

I have some links and ideas I’m in the process of compiling, from financial types who recommend where to invest now, if at all.  Also some additional ideas for finding cash.  Here’s one for today:

- Get rid of gas cards, which have extremely high interest rates.  Pay cash, and start carpooling once a week or more. Just be sure to bank the savings.  Sounds trivial like most of htese savings tips, but they add up, and in changing your lifestyle you’ll become more financially sound.

Related articles by Zemanta

• How Not To Panic About The Stock Market [Investing]

What to make of short term market swings? Don’t let them fool you:

US To Face Poor Economy for 10-15 Years: Robertson

Companies can only prosper when there are customers, and if customers have no cash and their credit is taken away, they can’t buy.  Where do corporate profits and growth come from if there are no buyers?  (Other than the illusory “productivity increases” – which does not equal “profitability”.)

A friend asked me yesterday what to do: In her retirement account, she’s lost all of her gains over the past 5 years plus lost 15% of her principal (not including fees).   She asked, should she sell all her funds and invest only in money market funds?

My question to her: Do you really think the market will perform well enough in the next 2-3 years to not only “win”  your 15% back but earn more for you?   Do you want to learn enough about stocks and investing to take control of your own money to make that happen, and not to just take your broker’s word about “asset allocation” and what to do with your investment? (It didn’t help that her accounts are with a big-name brokerage making ridiculous fees for buying 6 funds that essentially trade all the same stocks…)

Both of her answers were no.  Given that, she decided.

She is selling her funds, and putting them into money market accounts for now, until she can learn more about buying bonds and CDs inside her retirement account, or, until it looks like the market is actually rebounding somehow.  She HATES the market, HATES stocks.  Not everyone should be in mutual funds in their 401(K).  The myths of defined benefit plans is hurting a lot of people. She got in because people told her that “historically the stock market returns 11%” or pick your favorite number.  That historical number has NOTHING to do with what anyone can or will earn. It was never a sure thing, as so many are finding out right now.

Remember: I know nothing about investing, I’m not a professional, and have no idea what anyone should do with their money. Ever.

Related articles by Zemanta

• Where to Keep Cash When No Investment Seems Safe
• Ideas for the Risk-Averse Saver

I can’t believe there are so many talking heads – notably, on CNN (Gerri Willis), but also Fox Business (Dave Ramsey), CNBC and others – still telling us to keep putting our money away in a retirement fund, because if you’re retiring in 10+ years, you want to keep averaging your investments… OK, so let me get this straight: The S&P 500 has had its worst DECADE on record, and it’s likely to keep going down or flat for the next 2-5 years, and you should keep putting money there??  When a huge portion of the index is financial companies?

This is why Jim Cramer has for a long time said to ONLY put into a 401(K) enough to get a match if you have one, otherwise  GO ELSEWHERE. I recommend a self-directed ROTH account, where you can invest in individual bond funds, stocks, commodity ETFs etc.  Whatever you think of Cramer, at least he’s telling people to be cautious and not to just keep blindly throwing money down the short-term drain.

Robert Kiyosaki also makes sense: he dislikes defined benefit plans for the precise reason that (1) people don’t know enough about investing to avoid danger (like, emailing or calling in to the cable news shows for advice about how to invest???)  and (2) you have NO CONTROL over your money and how it works for you!  If the market underperforms for 10 years, and you only have variations of the S&P 500 to invest in through your employer’s 401(K) plan, you can’t avoid a bad market.  How does that help anyone financially?

I am going to post a page with links to the people telling you to invest in the market, because in a year or two from now, I want to review their advice… so stay tuned…

Since the events of the past week or so, I’m guessing many people have stopped their retirement contributions, or at least redirected them to something other than the stock market.

But I had to laugh, when my company’s investment plan suggested that a “good” money market was one that only lost 3-5%, thereby beating the S&P for the past year.

Since when is a good investment something that simply loses less than other investments?  I am not an expert but I would bet that the 10-11% “average” stock market returns we’ve heard parrotted by all investment companies are sorely beaten up by 2008.  My crystal ball says good luck getting any kind of return at all in stocks for the next 2-3 years.  If you put 401(K) money in a fund under these conditions, I’d be intrested to hear how you think that is going to benefit you?