I’ve had a few people in my life tell me that they lost X % of their 401k during the (insert financial crisis).
Recently when a friend told me they lost 50% of their 401k in the 2008 time, I said: “Well you didn’t really lose anything, because you still had the stocks, and even though they were worth less, you still had the same number of stocks, so you could have waited it out?”
To which my friend replied: “That would be true if the person managing my 401k didn’t sell”.
I hadn’t actually thought about that. I mean personally most of my funds are in age based target funds, but those funds are also managed by someone, right? So is there a way to prevent someone from selling your stocks if the economy tanks? I have a pretty long retirement horizon (still in my 30s) so I can weather the storm for a bit.
Edit: Thank you everyone for the insightful answers. This really helps to clear things up
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Target funds are passively managed, which means nobody is sitting there trying to buy the bottoms and sell the tops, which is what we call actively managed funds. Not having anyone to constantly babysit them is what makes passively managed funds less expensive than actively managed in terms of expense ratios.
Target funds tend to consist of other passively managed index funds that provide broad market coverage and whose objectives are none other than to mirror the performance of a wide range of securities in a particular asset class.
If your friend’s 401k suffered a 50% loss in 2008 and did not recover on the way back up, that means either your friend panic-sold, your friend was in a (very poorly) actively managed fund, or (most likely) your friend is full of shit.
Regardless, I would recommend not taking financial advice from your friend.
To answer your question, as long as you hold passively managed index funds, you do not have to worry about someone “selling your stocks if the economy tanks.”
Work colleague crystallised their losses during the GFC by selling their 401k and changing the asset allocation to Cash.
They didn’t convert it back to stocks until 2018…
Reading this hurt so bad, I almost downvoted.
It depends on who is managing your money and what their investment strategy is. So many people, including “experienced money managers”, treat the stock market like it’s a blackjack table. Trying to capitalize on the rise and fall of stock prices which are often driven by investor enthusiasm; or lack thereof. They’re like dust in the wind.
“Buy low sell high” is a great slogan but a lousy investment strategy. Investments are a long game. When you, or whoever is managing your 401k, buys stocks they’re using your money to buy ownership in a business. Diversification, not having all your investments in one stock or even one industry matters. Long term viability of the businesses you invest in matters. Investing in good, sustainable business that are not overvalued (meaning the stock price exceeds the book value) matters.
You want someone managing your money who does their research, understands what they’re investing your money in, and knows that when stock prices go down, it’s the best time to pick up more good investments at a discount. Not to panic and sell everything. That’s almost always a losing strategy.
That said, Lots of 401k’s are invested in index funds which have a detailed investment strategy that the broker handling your 401k should be able to provide you with a copy of.
“Buy low sell high” is a great slogan but a lousy investment strategy.
It’s an amazing investment strategy in the same way that “just run faster” is an excellent way to win a marathon.
They’re both true, and both completely useless.
