Beating Broke

Personal Finance from the Broke Perspective

You Are Not Losing Money In Your 401(k)!

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I was watching my local news when they did a spot on people who were vacationing a little closer to home this holiday season because of the economy or other reasons when one of the people who they interviewed blamed their need for staying closer to having lost money in her 401(k).  Besides the fact that that money is, for all intents and purposes, off limits until you retire, and really has no effect on your current financial standing, how do you lose money in your 401(k)?

Did it get misplaced?

I’m being a bit facetious here to prove a point.  To lose money implies that the money is no longer yours.  Except that the majority of your “money” in a 401(k) isn’t actually money.  It’s shares of companies or mutual funds or index funds or ETFs.  You aren’t losing money.  You’re losing value.  The securities that you purchased with your money are not as valuable as they were when you bought them.  You still own the same amount of securities, which you converted your money to, so you still have all of your money.  It’s the value that you’ve lost.

Better example.  You buy a car for $10,000.  After driving the car for 5 years, you sell it for $5000.  Did you lose $5000 on the car?  Not really.  Very few people will think of it that way.  Because most people do not assume that they will gain value in a car, so they accept that they will not be able to sell the car for the same amount they bought it for.  And it is almost guaranteed that it won’t gain any value.  Again, though, you lost value, not money.

Losing value isn’t as bad as losing money. Why? Because, unless you need to realize that value immediately, you have time to wait and see if the value does go up.  And with securities, chances are that they will.  And in a locked up instrument like a 401(k) with all it’s penalties to discourage realizing that value until retirement, many of us have decades to wait and see how things turn out.  And, if I were a betting man (which I am sometimes), I would put pretty good odds on my 401(K) gaining value between now and when I need to withdraw any of it.

Note: I don’t encourage waiting to see if the value of your car will go up.  Unless you plan on waiting decades for that also in hopes that it will become a classic collectable.

Dollar-Cost Averaging

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Let me start by saying that investing is risky business.  You should consult a professional for professional advice before doing any investing.  I’m a hobbyist, not a professional.

What exactly is dollar-cost averaging?

Dollar-cost averaging is a method of long-term investing.  By buying stocks in smaller chunks over time, the amount you pay for the stocks will balance itself out to an average.  So, in an example, if you were to buy 1 share of Microsoft for $50, then another share for $40, your dollar-cost average price per share would be $45.  So if the shares go back up to $50, you would be making money by selling.  Obviously, this is normally on a much larger scale.  Think 10s, 100s and 1000s of shares.

Another example.  If I buy 50 shares of Microsoft stock at $50 and then the stock market tanks.  Suddenly, my 50 shares of MSFT are only worth $25 each.  That hurts.  The stock is still strong, but the market is poor.  I decide to buy more.  This time, I can buy 100 shares for the same amount as before.  Now, I own 150 shares of Microsoft and my total cost is 50@$50 and 100@$25.  My cost per share is dollar-cost averaged down to $33.33 each.  The stock only has to gain $8 for me to break even, and anything beyond that is gains. (note that I’m not including anything as far as fees.  Those will vary)

In troubled economic times, many people often overlook the benefits of dollar-cost averaging and participate in the mass hysteria.  If, instead, investors would take advantage of the opportunity, they could find themselves the recipients of a handsome profit when the market returns to it’s normal levels.  That, of course, is if it returns to it’s normal levels.  Which it most likely will.

Dow Drops 504 – Now What?

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The Dow dropped by nearly 504 points (503.99) yesterday.  Now what?  Don’t panic.  As the bells start ringing to open the markets again today, they will likely slip even further.  Don’t panic.  There’s a silver lining to this.

I’m an optimist.  The glass is always half-full.  The silver lining here is actually a benefit of Dollar-Cost Averaging.  If you don’t know what that is, you’ll pick up a little bit in this post, but it’s a good time to subscribe to this site as we’ll be discussing DCA a little bit further later this month.

As everyone knows, if you want to make money in the stock market, you have to buy low and sell high.  A lot of money can be made if only you can do that.  Most of us don’t have the crystal ball to do it perfectly though.  Let me help you out.  Buy now.

When you see a headline like the one above, it’s a pretty safe bet that it won’t get much lower.  And if it does?  Dollar-Cost Average to the rescue.  And in the long run, the market will come back up, and you won’t even need another dot-com bubble to make yourself a safe full of money.

So what if the Dow drops more than it has in 7 years?  Buying at a low like this can only help your Dollar-Cost Averaged prices.  And if it gets lower?  Buy more.  Pretty simple really.

The people in charge here at Beating Broke are not financial professionals.  Please don’t take our advice for gospel.  If you are going to follow the advice here, please consult a financial professional first.  And, just for the record, nothing is a sure thing in investments.  So if you lose all your money, don’t come crying to us.  And don’t sue us either.