How the decline in stocks could help your 401(k)

If you believe that the economy and stock market will recover, you should rebalance your portfolio, strategists say
Associated Press
Feb 19, 2014

 

This year's stock market decline has left investors uneasy.

But money managers say take a breath — the downturn could offer opportunities to strengthen your retirement savings for the long run.

Signs of slower growth in China and other emerging-market economies, as well as weak reports on U.S. manufacturing and hiring, have shaken investors' confidence. And while the stock market had a four-day rally recently, most big indexes in the U.S. are still negative for the year.

There's an upside though. People making regular, fixed purchases of stocks or bonds through a 401(k) retirement plan can now buy more stocks at cheaper prices. Falling prices also allow them to shift, or rebalance, their portfolios toward stocks and away from bonds. Lower prices can be viewed as opportunities for those who believe the market will climb over the long haul.

More broadly, a sell-off can be healthy because it resets investors' expectations after big gains, and it stops the market from getting out of line with economic reality.

REBALANCING PORTFOLIOS

After the stock market collapse of 2008 and the Great Recession, many investors switched their investments from stocks to bonds, or cash, because the assets were considered less risky.

Those moves paid off for a few years. But with the overall economy looking healthier, many analysts are advising investors to put more money into stocks and cut their exposure to bonds. That's because long-term interest rates are expected to rise as the economy improves and the Federal Reserve reduces a huge bond-buying program.

Rising interest rates in an environment of accelerating growth is good for the stock market, but bad for bonds, says Gerry Paul, chief investment officer for North American Value Equities at Alliance Bernstein. Investors should hold stocks to offset losses they will suffer if interest rates climb.

So far this year, the opposite has happened. Stocks and interest rates have fallen as nervous investors look to buy safer assets. As bond demand and prices rise, their yields fall.

The Standard & Poor's 500 index has fallen 1.6 percent this year. At its worst, the index was down 5.8 percent from a peak of 1,848 reached on Jan. 15.

"Even though they might be scary at the moment, you need stocks," Paul says.

If you believe that the economy and stock market will recover, you should rebalance your portfolio, strategists say. Add to your stock holdings at a lower price, while selling bonds at a higher price.

"Rebalancing is one of the most important tools that investors need to use," says Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. "People don't use it as much as they should during times of volatility."

While it makes sense to buy low and sell high, it still feels risky.

Investors pulled a record $18.8 billion from U.S. stock mutual funds and exchange traded funds in the week that ended Feb. 5, according to data from Lipper. Much of that money appeared to make its way back into bond funds, as taxable bond mutual funds and ETFs saw inflows of $10.7 billion.

As the old adage goes, stocks are the only thing that people don't want when they're on sale.

DOLLAR-COST AVERAGING

People can invest in stocks and bonds through 401(k) retirement plans, and they fund these accounts with regular payments, a practice known as dollar-cost averaging.

The advantage of this type of buying, as opposed to investing lump sums now and then, is that investors don't have to worry about timing their entry into the market to buy at low prices or sell at high ones. Those peaks and valleys are hard to predict, even by the most experienced investment professionals.

Investors buying U.S stocks now are getting them at lower prices than they were at the start of the year, and will benefit if prices turn up again.

"You know that at some point the market is going to be up, or the market is going to be down," says Brad McMillan, chief investment officer for Commonwealth Financial, a stock broker and financial adviser. "But you're not betting it all on one single emotional decision."

PULLBACKS CAN STOP BUBBLES

2013's steady advance for stocks was more the exception than the rule, most stock market observers agree.

The gains of nearly 30 percent were the best for the S&P 500 index since 1997. They were also remarkably smooth, as the index climbed in 10 out of 12 months.

While company profits also climbed, much of the market's rise was driven by investors' willingness to pay more for stocks. Using forecast earnings for the next 12 months, the price-earnings ratio for companies in the S&P 500 rose from 12.6 at the start of the year to 15.3 by the end, according to FactSet data.

Stocks weren't quite in bubble territory, but they were getting there, says Commonwealth's McMillan.

Corrections and pullbacks help "to reconnect market values with reality," McMillan says. "It's kind of a reality check."

Bubbles happen when investors ignore economic fundamentals and buy stocks just because they believe they will rise in price. Remember the internet bubble of the late 1990s? Or the housing bubble that led to the financial crisis?

Retirement savings took a big hit when those bubbles burst.

 

Comments

Dr. Information

CBO released today that Obama's push to increase the minimum wage to 10.10 an hour will kill another 500,000 jobs. Great work Obama.

deertracker

The report really was inconclusive. It could cost up to a million jobs but in reality they don't know. Studies have been done in neighboring cities where one city raised the wage and one didn't and there was no job loss.

Contango

Re: "neighboring cities (snip)"

Too simplistic. There were other economic factors involved in order to offset a rise in wages without a comparable increase in productivity.

The Obama admin. has done more than enough to help dampen economic recovery and growth.

deertracker

Did the CBO use those same economic factors in their report? It has been proven that a higher wage increases productivity, morale and reduces turnover. Why would anyone be thrilled to work a full time job but still can't pay the rent? Low wage employers actually encourage the use of entitlement programs.

Contango

Re: "It has been proven that a higher wage increases productivity, morale and reduces turnover."

Prove that nonsense.

So why are employers increasingly turning to automation?

So do you have any money in the mkt. (topic) or are you just yammering?

Peninsula Pundit

Common sense, not nonsense.

I looked all up and down this board for you to weigh in on the content of the article itself (real topic), but you were too busy snip(ing) with your tea friends.

Contango

Re: "Common sense"?

So are you a business owner that pays top dollar and rich bennies to all of your employees?

Scroll down to the second post: "Wed, 02/19/2014 - 10:33am"

Can't address the topic? No money in the mkt?

JudgeMeNot

deerpoo, If you have $100 an hour to pay employees, and the going market rate is $5.00 an hour, you can hire 20 employees. If you increase it to $10.00, you can now only afford to hire 10 people.

Result: the poorest, youngest and least educated (0-bama's low info voters) are screwed out of jobs.

The Hero Zone's picture
The Hero Zone

Not necessarily related to what Deer said, but of similar topic I wonder why our government doesn't go with the highest bidder instead of the lowest? The highest bidder wants to pay their employees the most and must "care" more than the lowest. Why don't we see a policy made that advocates that?

I also crack up laughing every time I see (primarily on Huffington Post but I think once or twice here) people make the argument of "if you can't pay a living wage you shouldn't be in business." Then usually under that those who reply are whipped up into a frothing orgasm lauding that statement as some kind of deep philosophical/economic argument and the one who posted that is a philosopher-king who should whisper sweet nothings into the President's ear. Never mind the rampant unemployment it would bring, that doesn't matter to those "who got theirs" or the fact that those who say such things don't seem to own a business themselves.

Must be nice to command others what to do about something you know nothing.

Contango

Good points!

FYI:

"China, the largest foreign U.S. creditor, reduced holdings of U.S. Treasury debt in December by the most in two years as the Federal Reserve announced plans to slow asset purchases."

http://www.bloomberg.com/news/20...

Maybe they're startin' to get tired of carrying our debt?

The Hero Zone's picture
The Hero Zone

When do you think we'll hear from commentators here or those in D.C. say something like, "The Republicans in China don't care about middle-class Americans and those needing jobs that rely on their money to make ends meet. Our government made promises that China has to pay for and for China to default on our debt is reckless brinkmanship that only hurts the unemployed and poor. Americans have a right to life, liberty, and the pursuit of happiness and China's xenophobic conservative agenda is threatening the progress we've worked so hard to achieve for our voters."

Contango

"Paulson Says Russia Urged China to Dump Fannie, Freddie Bonds":

"Russia urged China to dump its Fannie Mae and Freddie Mac bonds in 2008 in a bid to force a bailout of the largest U.S. mortgage-finance companies, former Treasury Secretary Henry Paulson said."

http://www.bloomberg.com/apps/ne...

FYI:

In 1956, Pres. Eisenhower forced Britain to remove troops from the Suez Canal by threatening to dump their sovereign debt.

http://en.wikipedia.org/wiki/Sue...

There is obviously a precedent for blackmail using sovereign debt.

The Hero Zone's picture
The Hero Zone

Thanks for the tidbits, always good to learn something new. Also in thinking about it with the executive order that our Ki- er, President made regarding new Federal contracts I suppose it is in a way shopping it out to the highest bidder.

Contractor: "Ok so we can do the job for $1M, looks like we're the lowest is that good?"
President: "Are you paying my mandatory, imposed minimum wage?"
C: No, that was the standard rates of labor for the service we provide to private, city, and state entities. With your suggestion the price will go up to $1.2M.
P: We'll pay you more to pay your employees what we tell you you should pay them.
C: Really? You'll up the bid FOR me?
P: Yeah, duh! That's what government does.
C: Cool, I didn't even need my wife to bake you an apple pie. I actually feel like you are giving me one, if you get what I mean. But what about the supervisors who are making the same that my base labor will? I'll have to bump up their wages too. Do you have a regulation for that?
P: Nope, pay them whatever you want. Just come in $0.01/hr. less than your competitor. Hello?! We're giving you the money we demand you have to pay what we demand you pay. It's not a hard concept, you don't have to be a ten-year Constitutional lawyer like I am to figure this out. I'm not in the habit of actually shopping out work, we could have just made a no-bid contract like we did with the ACA. You should feel lucky I found it within my judgment to go through this middle-man-stuff.
C: So I bump up my supervisor staff, what about my management?
P: You are making this entirely too complex and taking it outside of my intention. My intentions were made pretty clear, period. I told you what to do now do it.
C: You'll cover the increase in overtime at the mandated rate, too, right?
P: Why are you still in my office? I have important stuff to do like see how much water a billionaire friend's private desert golf course consumes. This is important leadership stuff. I think I have something in Fresno, too...
C: Cool, thanks. I like this cutting out the middleman stuff. Congress is such an unorganized bunch anyway.
P: SEE?! That's what I'm talking about. I'm glad someone understands. Now to make everyone else.

The Big Dog's back

Excerpts from a right wingnut mind.

Peninsula Pundit

Joe Walsh said you can't argue with a sick mind,Dog.
I never see better proof than these earnest and compassionate 'conservatives' here.

The Hero Zone's picture
The Hero Zone

With what above do you disagree or have a problem?

Feel free to articulate your concerns, my sick mind can keep up especially since I'm freed up at the moment. My day isn't complete unless I pour a barrel of radioactive waste into a shelter of orphaned puppies and I have personally executed three retirees. Fortunately I've met my quote of babies eaten and money taken directly from people to keep them poor since the economy is a zero-sum game so you don't have to worry about me not being up to par.

So please, explain your ideas and/or point out my incorrect examples.

The Hero Zone's picture
The Hero Zone

Are you saying that if I ran for U.S. Rep. you wouldn't vote for me?

Contango

Truism: Best time to get into the market was last year.

Seriously, timing is 'not bad' to re-allocate and take some 'change off the table.'

The S&P 500 is up 177% from it's low in Mar. '09.

How long the run up can continue is anyone's guess.

But this much is known - it won't last forever.

Nobody rings a bell when it's time to get out.

The Big Dog's back

You just can stand prosperity under Obama.

Contango

Re: "You (snip)"

Doin' pretty damn good thanks to the Fed. Resv.

Pres. Obama is the economic drag.

thinkagain's picture
thinkagain

What decline?

Donegan

I heard through the grapevine Obama signed a executive order that officially made it against the law to say the word "Taper" within 200 foot of any trading establishment. The admin claims that doing so would cause the stocks to fall, ruin any chance of re-election of the Democrats running and be considered terrorism by causing a panic.

Darwin's choice

Today 2/19, is the 69th anniversary of the invasion of Iwo Jima.

Semper Fi to all those brave men who gave so much.