Is losing money in my 401K normal?

Question

I had about $10.5K in my Fidelity 401K account invested in their target fund. I started it a year ago. This is my first time with investing in the stock market.

For the past 2-3 months, it keeps going down. Now it's at $9K. Lost $1.5K.

I don't need this money for next 20 years. Question is, is this normal? Should I pull the money out? I had seen the fluctuations in the last year, but that was like losing $200 to $300 and coming back up. But for the last few months, it keeps going down.

What's your advice?

Answer 1

Depends on how the money is invested within the 401k... but in general, prices move both up and down with a long-tem bias toward up.

Think of it this way: with fund shares priced lower now, you are getting shares cheaper than when you entered the plan. So this dip is actually working in your favor, as long as you are comfortable trusting that long-term view (and trusting the funds your 401k money is going into).

Believe me, it's even scarier when you're nearer your target retirement date and a 10% dip may be six figures... but it's all theoretical until you actually start drawing the money back out, and you have to learn to accept some volatility as part of the trade-off for getting returns better than bonds.

Answer 2

It is absolutely normal for your investments to go down at times.

If you pull money out whenever your investments decrease in value, you lock in the losses. It is better to do a bit of research and come up with some sort of strategy about how you will manage your investments. One such strategy is to choose a target asset allocation (or let the "target date" fund choose it for you) and never sell until you need the money for retirement. Some would advocate various other strategies that involve timing the market. The important thing is that you find a strategy that you can live with and that provides you with enough confidence that you won't buy and sell at random. Acting on gut feelings and selling whenever you feel queasy will likely lead to worse outcomes in the long run.

Answer 3

My two cents: I am a pension actuary and see the performance of funds on a daily basis. Is it normal to see down years? Yes, absolutely. It's a function of the directional bias of how the portfolio is invested. In the case of a 401(k) that almost always mean a positive directional bias (being long). Now, in your case I see two issues:

1. The amount of drawdown over one year. It is atypical to have a 14% loss in a little over a year. Given the market conditions, this means that you nearly experienced the entire drawdown of the SP500 (which your portfolio is highly correlated to) and you have no protection from the downside.

2. The use of so-called "target-date funds". Their very implication makes no sense. Essentially, they try to generate a particular return over the elapsed time until retirement. The issue is that the market is by all statistical accounts random with positive drift (it can be expected to move up in the long term). This positive drift is due to the fact that people should be paid to take on risk. So if you need the money 20 years from now, what's the big deal? Well, the issue is that no one, and I repeat, no one, knows when the market will experience long down moves. So you happily experience positive drift for 20 years and your money grows to a decent size. Then, right before you retire, the market shaves 20%+ of your investments. Will you recoup these damages? Most likely yes. But will that be in the timeframe you need? The market doesn't care if you need money or not.

So, here is my advice if you are comfortable taking control of your money. See if you can roll your money into an IRA (some 401(k) plans will permit this) or, if you contribute less that the 401(k) contribution limit you make want to just contribute to an IRA (be mindful of the annual limits). In this case, you can set up a self-directed account. Here you will have the flexibility to diversify and take action as necessary. And by diversify, I don't mean that "buy lots of different stuff" garbage, I mean focus on uncorrelated assets. You can get by on a handful of ETFs (SPY, TLT, QQQ, ect.). These all have liquid options available. Once you build a base, you can lower basis by writing covered calls against these positions. This is allowed in almost all IRA accounts.

In my opinion, and I see this far too often, your potential and drive to take control of your assets is far superior than the so called "professionals or advisors". They will 99% of the time stick you in a target date fund and hope that they make their basis points on your money and retire before you do. Not saying everyone is unethical, but its hard to care about your money more than you will.

Answer 4

While historical performance is not necessarily indicative of future performance, I like to look at the historical performance of the markets for context. Vanguard's portfolio allocation models is one source for this data.

Twenty years is a long term timeline. If you're well diversified in passively managed index funds, you should be positioned well for the future.

You've lost nothing until it's realized or you sell. Meanwhile, you still own an asset that has value. As Warren Buffet says, buy low and sell high.

Answer 5

Or, you can roll over your 401k to a "directed" 401k giving yourself total "checkbook" control over your investments. You may invest in the same losing garbage (following the crowd) or invest in real estate, foreign currency or even precious metals as a hedge. Or, as the roller coaster picks up speed (like now) you can just park it in savings (go liquid) and hope the USD does not collapse (as global circumstances indicate will happen by 2020). Reserve currencies are not forever, folks and economies collapse (like Rome). If it is our time soon, then all monitized bets are off. Investments in "hard" assets (land, water rights, metals, farms) will be all that matters.