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.
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Thias @WealthHike says
Great points! I love the car example as I have tried explaining this to family members in the past. No one accounts for the fact of the value you received while you owned something. You obviously got value from being able to drive.
The same can go for investing. You receive value in the form of dividends and appreciations. If you lose some of the value, you don’t lose your positions in the company (unless they go bankrupt but hopefully you don’t own any company that could go bankrupt that quickly). Investing should be for the long-term as well, so if you lose value in the short-term it shouldn’t have a direct effect on how you are living today.
You made the point i have been wondering for years! In 2008/2009, some co-workers were crying literally due to extreme ‘ loss of money’ in their 401s, but I was like “how can that be if you have the same # of shares? “. They said i didn’t get it but you just said it! Thanks!