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Fund 401(k)?

Chris Farrell Sep 23, 2008

Question: I am in my 30’s and committed to a long term investment in my retirement. I have decided not to look at my 401k during this terrible financial time, since I am in it for the long haul. I have heard some commentators on the show mention that they are doing the same.

My question is – should I significantly decrease my contributions or stop contributing to my 401k all together until this crisis has passed?

I understand that could be awhile. My plan would be to put the money that I would have contributed to the 401k into a regular savings account. I know it won’t grow but it probably won’t disappear. Thanks for your help! I love the show. Nicole, Brooklyn, NY

Answer: You’re far from alone in your confusion and nervousness. We’re all feeling the financial strain of the past few weeks. My advice is to continue to put money into your 401(k). Last week, here’s what Michael Mauboussin, chief investment strategist at Legg Mason’s said to me last week: “With a longer time horizon, say 10 to 20 years, even the crash of 1987 looks like a blip.”

However, you can always change where the money goes. The best strategy for most people your age, say, 20 to mid-40s, is to stick with the existing asset allocation. Assuming you have a well-diversified portfolio you’ll do better staying put than selling in a panic. But you might have learned the hard way that your portfolio choices are too risky. You don’t like this volatility. If that’s the case, I would figure out how you’d like to adjust your portfolio to a more conservative position, and then do it over time. For instance, I would look at putting some money into a safe harbor like Treasury Inflation Protected Securities. Many 401(k) plans now offer a mutual fund option that invests in TIPS. If that isn’t available, another conservative option is a fund made up of short-term Treasury bills.

The exception to this overall approach is if you’re holding a risky, highly undiversified portfolio. In that case, I would bite the bullet and make major changes fast.

A final thought: While I would keep funding the retirement savings plan no matter what–especially up to the company match–it can make sense to reduce your contribution if you don’t have emergency savings or if you can sense you’re at risk of getting laid off.

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