It never fails. My best article ideas come from my clients! Thank you!
Today one of my clients called and asked a rather interesting question: "Do 401(k)s have stop-losses?"
First, let me define what a stop-loss is, for those of you that may not know. A stop-loss is an order that is placed, usually on a stock, to sell when the price declines to a certain level. Stock investors use them when they want a predetermined exit point when a stock declines. It can save them a boat load of cash if the security experiences, shall we say, an express elevator to the basement?
I thought the idea of a 401(k) stop-loss was interesting -- until I thought about it.
First, this client was relatively young.
Most 401(k) participants have some time before retirement. Ten or twenty years, or more, in some cases. So selling every time the market gets a wee bit nauseating can be counterproductive. I counseled him to use this as an opportunity to be more aggressive with contributions. Why not? His investments just went on sale! Face it, if Wal-Mart marked everything down between 10 to 30 percent, you'd go buy something. We run like hell from a sale in the stock and bond markets.
Wouldn't having a stop-loss on your 401(k) be sort of like market timing?
You betcha. You have to know the right time to sell. Then, you have to be confident of the right time to pull the trigger and get back in. Difficult decisions at best, even for professionals. There have been studies that show if you miss even the best 10 trading days (these are days with the highest gains), your portfolio return suffers greatly. You could give up potential return hesitating to get back at the right moment.
As I spoke further to this client, he also asked me if I thought that emerging markets were causing the current market volatility.
My answer was simple: maybe. Even if emerging markets were contributing to a small sell-off so what. If you think back, only serious threats to the earnings of companies really really forced long-term slides in those stocks. Stocks, and the market, move a little on investor sentiment, headlines and such, but move up or down in the long-term based on earnings. Moral here: Stay put in quality investments.
At last, I think he finally agreed. Selling out to save a few percentage points was not advisable. I do get his point though. He's trying to preserve capital before the next big market decline.
Remember, everybody has a high tolerance for risk in a bull market. Judge your risk tolerance in turbulent times not good times.
It will give you a true sense of where you need to be. If you think that this stock market is starting to make you nervous, it may be time to reassess your tolerance for risk.
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You know you can't afford it. You might as well be burning your money.
A good credit history is essential to a successful financial future. Landlords, lenders, insurers and even employers use it as a way to judge you.
Yes, you want to make sure that you establish a credit history, but that does not mean taking out every credit card imaginable. Taking our high-interest cards with large balances can lower your credit score and lead to overspending.
If you want to increase your credibility in the eyes of lenders, paying bills on time is essential. Also, it is a good way to avoid unnecessary late fees!
A graduate degree is not only a financial investment, but a time investment. Before embarking on a post-graduate degree, it is important to do a cost-benefit analysis to ensure the diploma you are seeking is right for you.
Going after a degree at a time when you have to take out enormous student loans just to graduate puts you at a significant financial disadvantage once you finish school.
It is called your emergency stash for a reason! And no, a flash sale at Nordstrom Rack is not an emergency.
Be honest, when was the last time you actually had a full fridge? Despite what you keep telling yourself about how expensive groceries are getting, the bottom line is that eating at home saves money, especially if you are single.
We understand that retirement could not feel further way when you are in your 20s. But it is never too early to start saving. Need an incentive? When you are young, you have the advantage of giving your investments much more time to accrue interest and grow.
As much fun as it is to get a tax return at the end of the year from the IRS, you only get a big refund when your employer is withholding too much money from your paycheck during the year. If that's the case for you, adjusting your withholdings may be a good idea.
Most budget gurus suggest that your rent should be no more than 30 percent of your monthly income. If you are anything like us, you are paying much more than that.
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