Today I’m continuing my interview with John Hauserman of RetirementQuest.com. Yesterday we chatted about the money that was withdrawn from 401k plans when the economy took its tumble. You can read the full article here.
John, you indicated that pulling money from our 401k accounts might have been action spurred by the emotions of the moment. Can you tell us a little more about this?
Savvy long-term investors might have noticed something—history tells us very clearly that panic-driven dips generally turn out to be an unusually rewarding time to be buying stocks (assuming you have time to wait out the recovery) especially with a program like the systematic contributions to a 401k.
During the most recent market hysteria, shares of the worlds’ strongest and most profitable franchises and businesses went on sale for pennies on the dollar, and when investors realized that life as we know it had not yet come to an end, it was sadly too late, since shares had already staged an unprecedented price surge (even as the evening news blurbed of gloom and doom and continued to tout “worst ever” verbiage to describe the economy and stock market). As with most other economic cycles, the spoils went to those wise investors who maintained a long-term view and also those who were “not smart enough” to know that they should have panicked (I put that last part in because I have found that on average, those who simply put money into a diversified 401k and don’t mess with it fare better than those who try to over manage their accounts).
Yeah, I’ve heard a lot of people arguing with their neighbors about whether or not they should have pulled out their 401ks, some saying it was foolish to do so, and others saying it was foolish not to do so. John, later on I’m going to have you explain to us when we should and should not mess with our retirement funds and how to know the difference between the “worst ever” situations and the real economic emergencies we may face—it’s really hard to know which is which.
So, what is the second most common mistake people make?
Putting too much money into the stock of their employer and not remain fully diversified in their investments. If you happen to work for Microsoft from the beginning you probably disagree, but if you know anyone worked for Enron, Lehman Brothers, Lucent, Bear Sterns (etc. etc.)… you know exactly what I mean.
Excellent point! We can have all the company loyalty in the world, but if our companies go under, we’ll go down with them unless we prepare.
Thanks, John, and we’ll talk to you again soon.
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