MONEY SMART What to do with your 401(k) now?
By Jesse Brown, Author of Pay Yourself First - a guide to financial success
You’re not going to like what you see when you get this quarter's 401(k) statement.
How much worse can it get? A lot worse. But for African Americans we can not afford to hide under the Mattress. You can create a portfolio that’s meant to weather all market storms. Here’s how.
First the questions :
How much worse can things get? How can I protect myself? What can I watch as a barometer of change?
Those are the questions we’re all asking as we watch stock prices sink day after day
If your nest egg has taken a tum-
ble, it’s time to reassess. But for most of us, the urge to reach for higher returns (and thus higher risk) should be resisted. It’s probably time for you to take some action, but maybe not the actions you’re contemplating. Now is not the time to abandon stocks, for example, or trim back your 401(k) contributions. And it may not be smart to try to make up for past losses by taking more risk, either.
When I dig deeply into the mar-
ket’s woes, however, I come away thinking the weakness shouldn't sur- prise because of three interwoven factors:
The massive loss of investor trust in recent months. The undeniable effect of the falling dollar on American financial markets.
The red-hot stocks of the late 1990s are now the primary targets of investor selling.
The short answer to the first ques- tion: much worse.
I’m not writing this as a gloom- and-doom advocate. Stock prices can fall further because the histori- cal record shows they can. So take heart in at least one thing- if you’re worried, it’s not because you’re neurotic. You’ve got good reason to be concerned.
The second question: How can we protect ourselves? Diversification.
Yes, I know. You’ve heard that before.
But consider these figures. $10,000 invested in stocks at the end of 1928 would have been reduced to $1,640 by the end of 1932. If you didn’t get discouraged and could have held your breath for a long time, you would have been
4 CHICAGO DEFENDER / APRIL 18-24, 2012
back to a $10,000 break-even by March 1943.
If you had invested the same money in an equal mixture of stocks, government bonds and Treasury bills and rebalanced at the end of each year, however, your investment would have declined to $8,170, a much smaller loss -- 18.3% of your money. During the same four-year period, consumer prices fell 23.5%. As a result, your buying power increased even though you had less money! Bottom line: Diversify. Grit your teeth, pick a mixture of stocks, bonds and cash, and go back to it regularly.
The third question is a truly grit- ty one: Is there a barometer we can watch?
I believe the most reliable sign of a market bottom is a change in the flow of money into, or out of, com- mon stocks. Not the Dow Jones Industrial Averages. So far this year money has continued to flow into stocks. That is what Warren Buffet is doing -- Buy . It’s a diminished flow, to be sure, but it’s still posi- tive.
At major bottoms, people don’t invest in stocks. They shun them. They wish they had never heard of them. We’re not there yet. Collectively, we’re still wishing for stocks that double while we wait. What that means is that we may not be at the bottom. But we are close enough to dollar cost average into the market. The problem is that we should not be waiting on the side line because when the up swing begins we do not want to be out of the market. Jesse B. Brown is president of Krystal Investment Management , a financial advisory firm in Chicago. For a free copy of his success guide to saving send a self addressed envelop to P.O. Box
Chicago, IL 60637. He is the best selling author of the book Pay Yourself First -
A Guide to
Financial Success copies available at www.lulu.com
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