A number of my employees have asked me whether they should continue to invest money in their 401(k) or IRA plans because of the current economy.
They’ve lost between 40% and 50% of the money that was in their accounts, they point out, and simply don’t feel like losing any more. I can see the pain in their eyes and hear the fear in their voices.
It’s at times like this that I wish there was someone else who could answer their questions. I do OK handling my own money, but I’m not a certified investment counselor nor do I claim to be one. But there are several common-sense pieces of information that I share with my employees and would like to pass on to you, too.
While your retirement plan may have lost some net present value, in reality you haven’t lost any money.
To understand that statement, you must carefully look at your retirement plan and answer this question: Do the stocks, mutual funds and bonds that you’re invested in still exist?
With few exceptions, none of us have been victimized by companies simply going out of business. If we’ve followed the recommended practice of having a diversified portfolio, then our risk of loss by a company failure is extremely low.
While the present market value of our holdings has declined, the total shares that we own has not declined. We still hold the same number of shares of stocks, mutual funds and bonds as we did before the current economic downturn. Our fundamental investments are, in fact, still intact.
The financial world loves to deal in reports that show the net present value of various items. We’re happy when the net present value of the stocks we hold goes up, and the monthly report shows us the stock is worth more than when we purchased it. We’re saddened when its value goes down.
But actual gains or losses only occur when we actually sell these items. Until the item is sold, we either have potential profits or potential losses.
The one constant in the investment world is that the market will go up and it will go down. If you don’t need to sell any of your investments at this time, then you have no real losses.
I take comfort in the fact that the stock market has shown remarkable resilience. Over time (10- to 12-year periods), it has always shown a net positive growth. I’m invested for the long term and therefore don’t get overly excited about market fluctuations.
Now is the best time to put all you can into your retirement account.
The normal human reaction to financial problems is to become more conservative, increase cash reserves and limit risk. Many of my employees believe that now is the time to reduce or eliminate their contributions to their retirement plans until the economic situation improves. I strongly believe the opposite is true.
I don’t know if we’ve reached the bottom of the stock market or if it will drop some more, but I do know I’m able to buy more shares of stocks and mutual funds today with my regular contributions than I did a year ago. It’s like everything on Wall Street is having a half-price sale.
Now is not the time to stop investing in your retirement plan. I believe it’s the time to be more aggressive in your investments. The lower-cost stocks and mutual funds today will quickly add greater net present value to your portfolio when the market does recover.
Stocks and mutual funds are on sale because many investors are sitting on the sidelines trying to do the impossible — time the market. They want to put their money back in just after the market has reached the bottom and is poised to rebound. This is a pipe dream, because no one can accurately time the market.
The proven best strategy is to continue to develop a regular investment strategy and to follow it consistently. Take advantage of low markets by increasing your investments if possible, but don’t try to time the market.
Be honest about the condition of your business in today’s economy.
Respect your employees and let them know how your business is doing.
I know that a large number of drycleaners and commercial laundries that rely heavily on restaurant and hotel business are hurting. Many healthcare organizations are producing more than they did last year but the patient revenue is down for a number of reasons.
As a manager you must realize that employees are watching your business and know what’s happening. They need to know about your plans for the future and, above all, they want to know about their job security. They want to be a part of the solution, not victims of poor management.
We must realize that our employees hate not knowing. If management doesn’t meet their need for information, they’ll meet it themselves. Often their explanations are far worse and more hurtful to morale than the truth.
Don’t let your employees fill the void with their own information. Always be willing to answer questions and keep your employees aware of factors and trends affecting your business.