abcInvesting Blogs

August 2009

August 27, 2009

401k Investing: If You Didn't Panic, Then Rebalance

If you didn't panic when the stock market took a dive, good for you. Since the March 2009 low, stocks are up 50 percent. If you stayed with your plan, pat yourself on the back. Now it's time to think about rebalancing.

Rebalancing is when you bring your asset allocation--how your investments are divided among different types of assets--into line with your goals. For a simple example, let's say that a year ago you had 50% of your assets in the U.S. stock market, and 50% in U.S. bonds, and you started with $100. Here's what you had a year ago:

Stocks: $50 ( =50% of total )

Bonds: $50 ( = 50% of total )

Over the last 12 months, stocks are down about 20% and bonds are up 8%. Assuming no contributions or withdrawals, here's what you now have:

Stocks: $40 ( = 43% of total )

Bonds: $54 ( = 57% of total )

To get back to your 50-50 allocation, you need to sell $7 of bonds and buy $7 of stocks. I recommend that in normal times you do this rebalancing annually. With all of the market gyrations we've had, it makes sense to rebalance a little more often.

You can get more information about rebalancing in the drill down to Lesson 4 of The ABCs of Your 401k.

August 19, 2009

Emergency Cash Reserve

Chuck asked me to post his recent suggestions about an emergency reserve:

Get serious about an emergency fund: If you suddenly lost your home, your job, or were disabled with limited health or disability benefits, how would you afford a hotel, transportation or medical bills? How would you pay for all that? Credit cards? Okay, but how would you pay off those cards? An emergency fund needs to be three to six months worth of cash at a minimum kept in an easily accessible place—not as accessible as a mattress, but not in a stock fund or some other investment that might fluctuate in value and then be tough to access for a week or more. You need to treat that cash as money that isn’t there unless a disaster occurs. And try to open it with a high enough balance so you’ll keep it from being eaten away by any account maintenance fees. Write down a list of things that are potential emergencies and sign it as a personal contract with yourself. That agreement should state that you will not touch the funds except in case of some of the following:

Loss of employment;
Medical bills that exceed your insurance payments (if you have insurance);
Emergency home or car repairs in excess of insurance that are required to make the home livable or the car drivable.

August 11, 2009

Efficient Markets Hypothesis

I posted some comments about the Efficient Markets Hypothesis over at the Businomics blog.

August 9, 2009

Cutting a 401k Match: How to Soften the Pain

Many companies--23 percent--have either stopped their 401k match, or are considering it. Jeff Brown of the New York Times has an article with suggestions for small businesses considering stopping their match. Here are some highlights for business leaders:

If cuts must be done, make sure that management shares in the cuts. [ Several of my bank clients have cut management compensation much more than rank and file compensation, which really builds employee loyalty. WBC]
Look for opportunities to reduce fees paid by 401k participants. Many of the fees are hidden, but certainly can be reduced.
Take this opportunity to re-set your default options to be more investor friendly. Good defaults include participation rather than non-participation, and investment in a life cycle fund rather than a money market fund.
"The CFO-Schwab study found much employee hunger for financial education...." [Give us at abcInvesting.com a call about providing investment education to your employees.]

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