Money Obedience

Sometimes I blog, and after I post my comments I think further on the things I wrote about. I’m no different than other thinking people - the uncertainties surrounding life and personal finance can only be captured by continuously challenging ourselves and our assumptions. So, I try to keep my mind open. In fact, I quite enjoy stretching the use of my little noggin now and then. This time, I was focused on 401 contributions and our 401k investments. So, here we go with a follow-up.

As I said in the previous post, my wife and I plan to stick to our plan to save for retirement. While we will leave our basic plan alone, we do plan to make some adjustments when necessary. And we will retire and no matter how much we’ve saved by then, we still plan to enjoy each other’s company in old age. That is, no matter what happens, we will not allow the market turmoil to suspend our retirement indefinitely.

As I told you, I reviewed our various investments – some have gone down in value more than others, but not enough to warrant shifting our money around, yet. (We just received the statements for our 401k plans.) When we do make a shift (or “rebalance our portfolio”), the strategy we will use is one that will add to the funds that have fallen the most relative to other investments. These I will sell to raise money for new stock purchases. When I am done with these transactions, our relative exposure to the various investments will be the same as before the market rout started. In other words, by shifting things around a little, we balance to make our portfolio look like what it did before all the market ballyhoo started. That is, our strategy is to make sure that the market turmoil is not changing our investment allocation too much.

There’s another way to think about why one might want to rebalance – at times like this, when we buy stocks we get to add to our investments at relatively lower prices, while we get to sell investments at relatively higher prices. The stocks bought at lower prices (like nowadays) will rebound eventually. This technique is called “dollar cost averaging.” It works because buying low and selling high is always a good way to make money.

Let me explain how it works. Let’s say you started investing in 1925, 4 years before Black Monday, the Great Depression. You’d face a lackluster stock market for the better of the next 20 years. But if you left your money in stocks, even through those bad times, you really would be okay by the time you wanted to retire, as long as you kept adding to your investments. The same way of thinking works today.

There is only one problem with this technique. If you lose your job during bad economic times, you will not be able to contribute to the retirement account exactly at the time, when it is needed the most. Staying employed and staying a stock investment contributor is key! So let’s all keep our fingers crossed that we can keep our jobs and incomes at a relatively stable level, if not improving, even through the bad times. On this, I wish good luck to us all!