Don’t Panic!

A friend of mine came to me today and said she was going to move her entire 401k into bonds and make all future contributions to a money market fund “until the bear market is over”. Without telling her specifically what to buy (because I have no idea), I was able to convince her out of this crazy notion.

Here are some quick thoughts on how I think you should allocate your 401k:
You should come up with an asset allocation (stocks, bonds, commodities, gold, real estate, etc.) based on the number of years until you can retire. Run the model once per year and reallocate accordingly. All 401k contributions out of your paycheck should go into equity mutual funds, regardless of your age.

Especially for Retirement Accounts, Take the Long Term View:
For those of us with a long time to go before retirement, we should take a very long-term perspective with our retirement accounts. That means continuous buying of “growth” stocks – emerging markets in particular. Ten years from now we won’t be able to see the difference between stock prices in December 2007 and January 2008 – in future real terms, the difference will be meaningless. But the return you get from incremental purchases at these discounted prices will be huge. Consider that you can buy shares of the same fund for 20% less than you could a month ago. If emerging markets continue to fall… even better! Over the long term, you can make a fortune by “dollar-cost-averaging” into emerging markets. You make money (by buying) when stocks are down, not when they are up.

** My 4Q 2007 Portfolio Review has been delayed because my broker won’t provide my December 2007 statement. Once I get it in the next couple of days I can crunch the numbers. Writing about the good returns I earned in 2007 will be bittersweet considering that I’ve given a big chunk of them back in the first two weeks of 2008!

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2 Responses to Don’t Panic!

  1. Albert says:

    I am not that worried about the markets now. Most of the bad news are out now. I think that we are in some kind of flat correction.

  2. Paul says:

    I agree that a portfolio without diversification is wise. However you should also advise your friend that her 401k contributions should go into an S&P 500 index fund and stay there until retirement. It might be boring, but anything else is foolish (like trying to time the market).

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