abcInvesting Blogs

July 2008

July 22, 2008

401k Debit Cards: A Bad Idea Made Easy and Better

There are only a few occasions when I would recommend borrowing from your 401k. Now, if you want to borrow, you may have an easier way to do so: the 401k debit card. (Technically minded people call it a 401(k) debit card, but I dislike parentheses.)

Let's begin with a fundamental truth: you cannot fund your retirement by borrowing. You fund your retirement by saving.

However, suppose your transmission dies, and you need to lay out $2,000 in order to get to work every day. Keeping your job is important, both to your retirement and your current need for food and shelter. If you have no savings and no credit available, then go ahead and borrow from your 401k.

If you're thinking about a vacation in the Bahamas, do not borrow from your 401k. Buy a tent at a garage sale and camp at a state park. If you are thinking of a new motorcycle, do not borrow from your 401k. Buy a bicycle from the Goodwill store and get some exercise. Pretty much anything you are thinking of borrowing for, don't buy it.

If you do have to borrow from your 401k, the debit card is a good way to do it. First, it's more convenient. Second, you probably will not have to pay the loan back immediately if you change jobs. (Check on the details first, because some debit card programs may be different.)

Finally, if you have not yet funded your 401k and you are wondering whether you should do that before building up your savings account, ask your employer if they offer a 401k debit card. Then you can do both: save for retirement and have an emergency fund that you hope you'll never need to tap into.

July 12, 2008

Time to Buy Stocks?

The folks who write stock tip newsletters are more pessimistic than any time since July 1994, according to Bloomberg. (Hat tip to Greg Mankiw.) Well, what would have happened back in 1994 if you had ignored the pessimism and bought stocks anyway? Let's go to the chart:

I've marked July 1994 with a red diamond. Turns out, that time of pessimism was a pretty good time to buy stocks. In just 12 months time your assets were up 23 percent, plus you got dividends. That's better than twice as good as average stock market returns.

What's the moral here? Not to jump into stocks with both feet, but simply to ignore the doom and gloom attitudes all around you. Stick with a good allocation of your assets, and don't panic.

July 11, 2008

Stock Market Turmoil and Your 401k: Don't Panic

Jim Picerno has a recap of June's investment returns over at Capital Spectator. Stocks took a big hit. What should you do with your 401k? Take a look at my post over at the Businomics blog. It will encourage you to hold firm with your asset allocation. Or in the words of the Hitchhikers Guide to the Galaxy, "Don't Panic."

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