My Personal Rate of Return- A Dose of Reality

I will admit that I have been trying to avoid looking at my 401(k) account statement for 2008.  I knew it wasn’t going to be good and I wanted to spare myself the frustration of knowing that every single dime I stuck away into savings for the entire year was now history.  I finally broke down to see just what the damage was.  My retirement savings decreased by 42%.  That hurts.  All the money that I contributed, plus what my employer contributed as well as all of my dividends for the year…gone.

My income, while not minimum wage, is not substantial. I could have used all of those thousands of dollars I lost for countless other things, such as paying off my car or building my emergency fund.  Instead I did my best to think about my long term needs and tried to prepare for those.  It is hard not to be incredibly frustrated and have a feeling that I wasted thousands of dollars and a years worth of time having made absolutely no progress but rather ending up in a worse position than I had been a year earlier.

I’m already off to a bad start for this year as well, down over 7% since the beginning of January.  With the news that my employer will be eliminating company contributions at the end of the month it makes me question whether or not I should be pissing my money away into this Black Hole or use it for more pressing financial needs such as preparing for my relocation or paying off my car loan.  I also have some expenses I need to save for which are fast approaching.  Having that extra money every week would help out tremendously.

Even though the temptation to discontinue my retirement contributions is incredibly strong, for now I will continue to contribute.  Although my account balance is depressing and there doesn’t seem to be any hope for better times in the near future, the reality of the situation is that stocks are on sale right now.

When I started my 401(k) contributions, I funnelled my money into the riskiest types of funds available (International & Small-Cap Growth Funds) because I knew that the risk would be worth the reward.  Now that I have found myself in a “worst-case scenario” my emotions are telling me to cut my losses and put everything in cash, but my mind is telling me to keep buying while things are cheap.  I am battling an internal tug of war.

I know I am not the only one in this situation and I have two distinct advantages over people who are nearing retirement.  The first is that my 42% is not their 42%.  Percentages are deceiving.  42% is a large amount of money to lose but it is different when you are losing 3 years of savings versus 40 years.  I am very thankful that this economic situation took place while I am still able to fully recover my losses, which brings me to my next advantage; time.  I am still young and have many years before I will retire.  I can weather this storm.  People who thought they would be able to retire within a couple of years time may no longer be able to pursue that plan.  I have time on my side that some people don’t.

The reality is that this economic situation has affected us all.  The only thing any of us can do is make sure that we are doing what is best for our situations and our goals.  We have learned our lessons the hard way and now we understand the importance of such exciting financial topics as diversification and risk-tolerance.  We can only hope for better times.  In the meantime, figure out what you need to be doing to make the best of this mess.