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401(k) and financial stability
Old 10-04-2010, 10:07 AM   #1
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401(k) and financial stability

Hello all,

I am 26 and I am currently contributing to my 401(k) on a regular basis. I get a good employee match and so far my Investment has been doing well. However, I have a couple of concerns:

1) How safe is my 401(k)? Can I lose everything if, let's say the DOW drops 30% or something else happens? Is anything insured in my 401(k)?

2) If rolling over to IRA further down the road, how stable is IRA itself?

What I am ultimately trying to find out is if I can really trust these Investments
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Old 10-04-2010, 11:12 AM   #2
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Quote:
Originally Posted by netrisca View Post
Hello all,

I am 26 and I am currently contributing to my 401(k) on a regular basis. I get a good employee match and so far my Investment has been doing well. However, I have a couple of concerns:

1) How safe is my 401(k)? Can I lose everything if, let's say the DOW drops 30% or something else happens? Is anything insured in my 401(k)?

2) If rolling over to IRA further down the road, how stable is IRA itself?

What I am ultimately trying to find out is if I can really trust these Investments
There should be a plurality of options, with varying degrees of risk, in your employer's 401(k) plan. It is best to read the prospectus before investing, so as to better understand your investment.
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Old 10-04-2010, 11:27 AM   #3
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I would strongly recommend you read some of the books from the "investing" section from Nords compilation here: An updated FIRE recommended reading list (with a military twist). I'd also recommend lurking over at Bogleheads Bogleheads :: View Forum - Investing - Help with Personal Investments and then once you have a plan post it there for review.

DD
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Old 10-04-2010, 11:30 AM   #4
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Originally Posted by netrisca View Post
Hello all,

I am 26 and I am currently contributing to my 401(k) on a regular basis. I get a good employee match and so far my Investment has been doing well. However, I have a couple of concerns:

1) How safe is my 401(k)? Can I lose everything if, let's say the DOW drops 30% or something else happens? Is anything insured in my 401(k)?

2) If rolling over to IRA further down the road, how stable is IRA itself?

What I am ultimately trying to find out is if I can really trust these Investments
A loss of 30% does not equal 100% so in this case "no"

There are no guarantees in the investment world let alone life. For retirement saving, the best thing you can do is save AS MUCH AS POSSIBLE and doing so can help offset avg to below avg investment returns. If you are risk averse, you will probably want to allocate a higher bond % in your portfolio vs what is recommended for other people your age.
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Old 10-04-2010, 01:31 PM   #5
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1) How safe is my 401(k)? Can I lose everything if, let's say the DOW drops 30% or something else happens? Is anything insured in my 401(k)?
It depends entirely in what your 401(K) money is actually invested. If it's all in stocks, then your balance could drop a lot if stocks go down in value. But, you'd still own the same number of shares of stock, so if the value of each share goes back up (and, in large groups of stocks they always have--eventually) then the balance in your account will be back where it was. This obviously works best if you don't sell any shares while they are down in price.

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2) If rolling over to IRA further down the road, how stable is IRA itself?
Just like your 401(K), an IRA is just a type of account, not a type of investment. Inside your IRA you could choose to invest in stocks (with values that can go up and down a lot, but which have provided greater returns over long periods), bonds (smaller swings in value, but smaller returns than stocks), or even things like a bank Certificate of Deposit (which has no ups-and-downs in price, but which generally pays a lower return than stocks or bonds).

I agree that you should read some of the books in the FAQ section and get comfortable with managing your money. It doesn't have to be complicated, and no one will have a greater interest in taking care of your money than you will.
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Old 10-14-2010, 09:13 AM   #6
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Thanks for all the answers. It is much clearer now for me. I am currently mostly vested in stocks. Is it possible to switch to bonds quickly let's say if the market starts sliding down?
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Old 10-14-2010, 09:27 AM   #7
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I am currently mostly vested in stocks. Is it possible to switch to bonds quickly let's say if the market starts sliding down?
You need to check with your plan administrator on your ability to change your 401k investment choices. Some allow you to change them online on a daily basis, others may have restrictions and longer wait times.

Good luck on determining when/if you should "switch to bonds quickly let's say if the market starts sliding down". I'd suggest reading up on asset allocation and risk tolerance and picking a mix of equities and bonds in your 401k that you can live with for the long haul - and through the inevitable market downs and ups...
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Old 10-14-2010, 09:59 AM   #8
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I will just add that you should come up with a pre-determined allocation to bonds and make your moves based on that. In other words, if you decide you should have a 20% bond allocation you should make the move NOW and not just when stocks start to slip & rebalance accordingly to maintain the 80/20.

Also all bond funds are not created equal so be careful what you are moving into. If your bond choices are limited or come with high expenses you might be better off using your Roth IRA as your bond piece as you can select where the $ goes.

If you want some suggestions for the bond mix, you could read some books as REWahoo suggested or go to Vanguard.com & view some of their bond allocations in the Target Retirement Funds to get an idea of what you might want to hold or up it by 'x'% since you are more risk averse.
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Old 10-14-2010, 11:30 AM   #9
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Thanks for all the answers. It is much clearer now for me. I am currently mostly vested in stocks. Is it possible to switch to bonds quickly let's say if the market starts sliding down?
I'd suggest going back to the books recommended above and reread them with concentration on the sections discussing "asset allocation", "risk" and "market timing".

DD
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Old 10-17-2010, 04:03 PM   #10
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You probably have representatives for the company that manages your 401K at your work place. I would personally talk to them in person. When you say "safe" I'm wondering whether you mean safe as in your investment choices or safe as in the actual account itself. Most IRA's are insured up to $500,000.. I think. Not FDIC insured like bank accounts, but it's a different institution. Regular bank accounts are FDIC insured up to $250,000 each. Listen..unless you want to put everything into CD's that earn 2 % returns until you retire your going to have to take some risk. I know I sure as hell don't want to work until I'm 65. Seriously though, you can get FREE advice from a professional most likely on site at your work place from a rep for your 401K.
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