When the value of your 401k drops I would be willing to bet that you say “I lost money in my 401k.” If this is the case, let me be the first to correct your vernacular in this instance. The correct way of describing the drop in your 401k value would be to say “My 401k declined in value.” The point I am making here is that your 401k value will fluctuate (and indeed drop) in value from time to time. But for you to LOSE money in your 401k it takes an additional action on your part to cause the loss.
Let me give you an example. Let’s say that you login to check the value of your 401k in the morning and you see that your current account value is $52,330. Later that day, a significantly negative piece of news is released causing the markets to plummet. The next day you decide to log back in to check the value of your 401k and you see that in just one day, your account value has dropped to $49,990, a drop of $2,340 or about 4.5%. Most people would inadvertently say that they lost 4.5% of their 401k that day. The important lesson here is that in your 401k (assuming you don’t have too much in your company stock) you can’t lose money unless you sell. If you have a smart, well diversified portfolio in your 401k you will certainly have many times when the value drops but if you login to your account and sell out of investments after they have dropped in value it is YOU that is causing the loss, not the markets. YOU are taking the temporary decline and making it a permanent loss by selling that investment(s) while it was down.
I can make the statement that the decline is temporary because we know that (so far) there has never been a period in time where a well diversified portfolio has declined in value and never recovered. Could that day come – I guess it’s possible. Could the day come where the sun stops shining – I guess that is possible too. The important lesson here is to not turn one of those periodic market declines into a loss in your 401k by selling. In fact, if you really want to do yourself a favor – login to your 401k and INCREASE your contributions when the value declines. Your future retirement lifestyle thanks you!
Published on January 24, 2015