401ks and the Stock Market - What You Need to Know

By: Alan McMillan

When it comes to long term investing, usually through a 401k, your money ends up in the stock market and for good reason. Most often it is in mutual funds, which are simply baskets of stocks, bonds, or other mutual funds. The reason for going this route is that it pays more than say putting your money into a savings account or CDs...a LOT more. But Wall Street (the epicenter of the US stock market) has its ups and downs.

Recent Headlines:

  • Global Stocks Fall Further Amid Doubts Over China
    • NY Times
  • Markets Enter New Day of Carnage, Amid Global Sell-Off
    • Washington Post
  • Dow Pares Looses After 1,000 Point Plunge; Global Markets Turbulent
    • Wall Street Journal 

You may have seen the headlines or media on the roller coaster the global stock market has taken lately. It causes any rational person to question where the hell do I put my money? Are equities (stocks) a safe bet?

Warning: I am not a financial advisor or broker so I do not give advice. The following is my opinion. And by the way, I have a lot of money in the stock market and I am selling nothing now.

Questions Abound:

  • Is the stock market safe?
  • Is it still a place where I can invest my nest egg?
  • Is it safe to put my 401k money into the stock market?

My opinion is yes, as in absolutely. 

First: I don’t know of another vehicle where you can get consistent rates of return for your investments over the long term than the stock market.

Second: Historically, there are many examples of periods where stocks took a nosedive like they did recently and then eventually rebounded. 

Morningstar, a trusted firm in tracking this information has a rather famous chart (this one courtesy of NY Life). It shows how the market did between 1926 (pre-‘The Great Depression’) through 2014. 

This shows, again between 1926-2014 large caps (companies with a value over $10b) grew 10.1% and small caps (companies with a value of ~$300m and $2b) grew 12.2% over this period.

But the stock market goes up and down right? YES. During that same period, we had a series of events that dramatically drove the market down:

  • The Great Depression (1929): The market was down 60% in four hours
  • Pearl Harbor (1941): The market was down 20% over three years
  • The Arab Oil Embargo (~1976): The market was down 48% over two years
  • The Crash of 1987: The market was down 22% in two weeks
  • The .Com Implosions (2000): In 3 years the S&P was -50% and the NASDAQ -73%
  • The Great Recession (2008): The S&P was down 53% over 8 months

And despite that, the market grew over time? YES, it grew dramatically.

The point is, some years you are up, some you are down, but mostly you are up, and over time it is a good investment. You are safe because as you leave campus, you are looking for a return over the long term, usually between 30-40 years from now. You will experience ups and downs, but if history is an indicator, and it usually is, it will go up a lot more than the occasional down.

There is a great article on market growth by Peter Dunn, he estimates that you should count on an 8% rate of growth over time. I think that makes good sense.

As you begin your career and you start to invest in a long-term retirement program, you need to know the basics about the market. I suggest you read one financial book a year (or audio book). With that, you will get a feel for the basics. Over time you need to get a professional to invest for you (that is done for you automatically in a company administered 401k program). As you wealth grows, you will need a licensed or accredited planner or broker.

Good Luck.

Be sure to let us know what you think in the comments below!

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