I have been receiving calls from clients asking if they should stop putting money into their retirement accounts at work. I invest monthly into my own 401(k). If you believe the market is going down and will never come back, then yes you should stop. If you believe we will eventually recover, even if it is a long time, then you should continue to invest. Remember, you want to buy low and sell high. Don’t let your emotions get the best of you.
I recently reviewed the history of one account that I started in 2002 during the 9-11 crisis. For the first two years, I had less money than I had invested. Then we had five strong years, and it was like someone put gas on a fire. I had bought a ton of shares cheap during those two bad years, and the account really flew with the recovery. Now with the recent crisis, I once again have less money than I have invested for the past seven years, but I am also buying shares at half price compared to last year. I learned my lesson and plan to continue buying, even if it seems a bit insane. I don’t need this money for 15 years, and I believe that my purchases today will reward me in the long term.
If you are within five years of retirement, then you should have a significant portion invested in bonds. The typical worker near retirement may want to have 40-50 percent in bonds. You still need to have some growth potential, but please get more conservative as your retirement approaches.
It is also wise to limit your own company stock to no more than 10 percent of your portfolio. I have been preaching this message for 25 years and have witnessed too many horror stories including Enron, Level 3, and yes, even good old local bell weather stock Union Pacific. It only makes good common sense to protect yourself.
One service I offer my tax and investment clients is a review of their company retirement plans. Even if I’m not directly managing the money, it is important to help in all areas of your financial life so you can enjoy a prosperous retirement.
Ron Dickinson, CPA, CFP, MPA-Tax