This article was last updated on April 11
I recently checked my Vanguard 401K account and was very pleased to see that it was up 20% in the last quarter! Still well down from high, before the great credit crisis of Autumn 2008, but at least it’s moving in the right direction now. However, my return could have been even greater had I re-balanced a bit earlier on because In response to the financial downturn, I had shifted my portfolio to a Stocks/Bond mix of 60%/40%, a conservative mix based on my age and not very diversified. Unfortunately as the market rebounded in summer I didn’t update my asset allocation in time due to the fact that I was tired of seeing the red on my 401K statements and was wary of another market swoon. If I had gone with a 80/20% mix, my return would have been nearer 30% or higher!
Ah well, live and learn I guess. So last week, I did change my portfolio mix to be more diverse and in line with my age, but also upped my contribution to the maximum allowed limit (see the 2010 401K and IRA maximums). If this is the beginning of a stock market boom, I definitely want to dollar cost average and boost my returns over the next 5 to 10 years.
Lessons Learned and Next Steps. Continued regular savings matter a lot. Most people agree that, given enough time, 401(k) accounts can recover from market losses. What’s impossible, however, is building more savings if you don’t save enough to begin with. If you have continued contributing to your retirement account throughout the stock-market debacle—and even better, if your employer continues to match your contributions—your account probably has more in total dollars than you expected. Younger people, who have smaller balances to begin with, will see a bigger impact from their regular savings. Contributing with every paycheck, as you do in a 401(k) account, isn’t necessarily the most-profitable or sexiest way to invest, but it’s a good discipline that helps smooth out the impact of buying in when the market is at high and low points. This has been underscored over the last two years for anyone who kept contributing to their 401K or IRA accounts.
Like me, most people have enjoyed a nice jump in their 401k, IRA and other retirement accounts as the stock market recovered over the last 6 months,. In fact according to the WSJ, despite the biggest and broadest decline in financial markets in a generation, the median 401(k) retirement account at Vanguard Group on Sept. 30, 2009, was up 7% from where it was two years earlier, when the market was near its all-time high. In the last 6 months, the average account is up 18%. This recovery in retirement accounts was aided by the fact that many kept up their regular contributions and so actually got a big boost from the benefit of dollar cost averaging into quality stocks at generational lows. Thus, when the market came roaring back, those cheap purchases scored bigger gains, reducing overall losses. So an investor who put $10,000 into a balanced portfolio in September 2007 and then didn’t add another penny was down 27% at the end of February and had $8,943 at the end of September, a loss of 10.6%. The investor who put in an additional $200 a month was down about 26% at the end of February, but only 6% at the end of September.
In uncertain times, diversification is also a good strategy. Stocks still have a ways to go, and the economy is still wobbly, particularly with unemployment high and real estate markets shaky. Prices could tumble again with a streak of bad news. Therefore it is important to diversify your holdings and regularly (every quarter at least) review your retirement accounts and ensure they are in line with your retirement goals.
Also, don’t forget catch up contribution limits for those 50+ has also increased. If you are age 50 or older and your employer allows it, you are also be eligible to make “catch-up 401k and IRA contributions” in addition to your regular retirement plan limits. These catch up contribution limits have also increased to a total of $5,500 which brings the 2009/2010 maximum 401K contribution limit to $22,000 for those over 50. For all those people who feel that they do not have enough of a retirement nest egg, this higher contribution gives them a great tax free opportunity to catch up.
Continuing to save regularly in a diverse mix of investments will keep you moving toward your retirement target (more on figuring this number in an upcoming post)and set you up for bigger gains when economic growth kicks in – and it will – and the stock market really takes off. If you haven’t got a retirement (IRA) account, open one up now via these top brokers.