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2 . 2 4 . 0 9 Moving this journal over to the webomatica site. Keeping an eye on the markets today, as I have been a lot lately, and noted that the DOW checked in just about 50% of the peak we saw this past summer 2008. That’s a pretty significant statistic, 50% down now if your portfolio tracked the major stock indexes. Before I shutdown my workstation for the day I took a look at a few of my account balances and cringed the thought of what the latest -3% drop might do for some of my long term accounts already in a sea of red for the year. I’m sure that I’m not alone in this boat, a lot of people I talk to are talking about painful losses, others just don’t bother to check in since they know that its bad bad bad. All this got me thinking about a possible breaking point for 401k contributions, and the start of what might just be an overall downward trend, if things were to continue going this way. In breaking point I mean that at some point I could see a significant number of 401k participants might just fold their cards down and refuse to play. It goes to the statutory structure of 401k deferred tax retirement plans. You pay a portion of your paycheck tax free into a retirement account that you can’t touch without penalty, until you are of retirement age. To sweeten the pot, your employer matches a certain percentage (1%, 5%, 10%, 15%, etc.) as part of a benefit package. Depending on the setup, you can then invest this money into regular securities on the market, or certain designated index funds proscribed by your employer. The additional benefit is that any gains you make on your account are tax deferred until retirement, at which every withdrawal from your account is subject to income tax. Logically, there are several benefits to participating in a 401k program, but most powerful are the tax deferred incentive for contributions, and the tax-deferred status for gains. However both of these benefits are tied to a single assumption that has been challenged in the recent market trends - an aggregate positive rate of return over time. Everything is fine when the market is appreciating at an exponential rate in boom time, but in prolonged recessions marked by triple digit losses in almost all sectors on consecutive days, weeks, at some point the incentives for contributing to a 401k, will be canceled out by compounding losses in the stock market. I’m getting a sense that what might be coming up, could be a breaking point for 401k contributions to zero, or at the very least, to the minimum employer match. Depending on each company’s set up, and fund allocation, we’re most likely looking at a 10%-15% drop on the year so far across the board, given the drops in the major indexes. With a SWAG estimate of 20%-25% tax rate, you can see that if the mounting losses continue, at some point in the near future they’ll meet or cancel out any tax benefit from a 401k contribution. If and when this happens, I could see a shift in behavior for those who are able to scraped by to meet the max ($15,500 for 2008, $16,500 for 2009) for the past few years, even despite all the economic turmoil in the markets, to one of cash savings and liquidity. In other words, things are so bad that even the most aggressive 401k contributors would conform to 401k deposits of 5% or lower. One would think that a change in investment strategy of this magnitude would surely have a significant affect the overall market, which would indicate an accelerating or a market sell off. From a very basic sense, I think this makes a lot of sense. I’ve been looking at what has been happening lately with the markets, and have been feeling more and more discouraged, thinking “whats the point?” Why save the money for later when it can just depreciate by double digits in a single day? I’d be better off putting that money into cash, and then eventually into US treasuries or some kind of short term CD. This might lose against inflation, but at least it wouldn’t go down in value. Then again, maybe the best strategy for this market in the short term is to simply not play. Lame disclaimer: I own some publicly traded stocks, bonds, and other securities in the market, some in regular investment accounts, others in tax deferred accounts and others in retirement accounts none of which are doing particularly well so for in 2008 or 2009. Therefore, none of this commentary is intended to, or should be taken as investment advice in any shape or form, express or implied. These are all just random thoughts and observations that a novice could do in these interesting financial times. |