Saving Your Retirement Account: "Share" It

When housing prices tanked during the Great Recession of 2007-2009, it set off a general alarm.  People who had been borrowing against the growing value of their home or had been flipping houses—speculatively purchasing properties and quickly selling them for a profit as prices were rapidly rising—saw that income source dry up, leaving them holding one or more houses that they could not unload or loans they could not repay.  Some took huge losses, defaulted on their loans, or even declared bankruptcy.  But for many other homeowners the drop in their property’s value had no practical impact.  They were not interested in selling their house, had not borrowed against it, enjoyed living in it, had no need to sell it.  For them, the devaluation of their home was all on paper.

 

That actually gives us a very useful way to look at our other investments. 

 

The average person saving for retirement is invested in mutual funds.  Mutual funds are sold in shares, and thus have a share price, much like the stock of an individual company.  That share price will typically fluctuate daily.  This only makes sense because mutual funds are collections of individual investments (like company stocks) that themselves fluctuate in price.  Although you probably measure your account value in dollars and cents, it is also measurable by numbers of shares.

 

What happens during a recession?  What most people see is the value of their investments going down as the stock market declines.  They are “losing money”, they reason, so to stanch the losses they take their money out of the mutual funds before they “lose it all” and put it into something safer; or even withdraw it entirely and put it into the bank where it’s insured and they at least get one hundredth of one percent interest.  Hey, it’s better than losing money, right?

 

 Not so fast.  Remember our contented homeowner.  As long as he didn’t have to sell his home, the drop in its value was essentially meaningless.  He might even save money on his property taxes due to a lower assessment.  Its value might be down temporarily, but he still owned one house.  Not 75% of a house or half a house.  One full house—and one day its value would go back up.

 

Likewise, the retirement investor still owns the same number of shares of mutual funds, even though their value is falling during a recession.  If he panics and sells those shares, he has converted a paper loss into an actual loss.  If he puts the money back into the stock market when things have “settled down” and stocks have risen, then what he has done is sold his mutual fund shares for a low price and bought them back at a higher price.  Moreover, since he sold the shares cheap and bought them back when their price had risen, the amount of money he withdrew will now buy fewer shares.

 

We tend to be protective of our money, especially if we’re counting on it for our future financial well-being.  It’s hard to watch the account balance falling when we’ve saved so diligently for years.  But mutual funds, being by nature a diversified investment and not reliant on just one or two companies’ stock prices to sustain them, typically make good investments for retirement.  If you are investing through a company 401k plan, then the funds they’ve selected to make available to you are usually pretty solid choices.  Unless they are geared to foreign investments, they will probably follow the general trend of the U.S. stock market, which has been upward throughout its history, albeit an uneven ride at times.  Those who stuck it out during the stock market plunge a few years ago and kept their money invested, have seen their investments grow beyond pre-recession levels.

 

Of course, if you are in or near retirement that means you may have to withdraw some of your investments to support yourself.  That puts you in the shoes of the homeowner whose house is depreciated at the very time he has to sell:  your paper loss will be made very real.  You will want to protect your dollars and cents account value, and that may well require a different strategy.  This is not investment advice.  Consult a professional for that.  I just want to give you a different way to look at your investments and save you from making what I think is the most common investing mistake: actions taken in panic that will deplete your account as effectively as any recession.

 

Until next time,

 

Roger

 

“Then he which had received the one talent came and said….I was afraid, and went and hid thy talent in the earth; lo, there thou hast that is thine. His lord answered and said unto him.…thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.”   Matthew 25:24-27 (KJV)