On The Roller-Coaster Ride

If you’ve got some of your retirement savings invested in the stock market, as many of us do, the last few days have been unnerving.  The market had an historic run up, and then it went down again.  Yesterday, where the Dow Jones Industrial Average at one point had dropped 1600 points, was an especially wild ride.

704254-001When the market behaves like this, what’s a normal investor, who’s not an insider or a financial kingpin, supposed to do?  You can get dizzy just reading all of the different views of what is “really” going on.  Some people say it’s just a predictable correction after years of historic gains.  Some say the Trump tax cuts have overheated the economy and the market is reacting to that.  Some say we’re long overdue for a bear market.  And some say the Federal Reserve Board hates President Trump and his focus on the stock market as a proxy for his presidency and just wants to bring him down low.

(The last theory, in which the Fed would be intentionally manipulating the market for overt political purposes, is especially troubling — and even in these conspiratorial times, seems pretty unbelievable.  To buy that theory, you’ve got to conclude that the Fed’s dislike for President Trump is so powerful that they are perfectly willing to take actions that torpedo the retirement portfolios of millions of individual investors just to give the President a black eye.  Could bureaucrats really be so disdainful of average Americans?  Call me naive, but I find that incredibly hard to believe.)

So what’s really happening here?  Beats me!  My guess is that the run-up has been so significant that there are lots of people out there who thought it was time to take their profits, and the downward movement caused by those sales then triggered some market-decline benchmarks that automatically produced further sales and caused the sharp fall — but that’s just a guess.  Maybe somewhere on Wall Street somebody knows the real answer for sure, but I doubt it.  The stock market is so complex, so huge, and so prone to human reaction that it’s difficult to explain these downward spikes.

So, to put the question again, what’s a little-guy investor to do?  If you think saving money for retirement is prudent — if you don’t, you probably wouldn’t read this post in the first place — and you need to find a place to put your money until the retirement day comes, there really aren’t many alternatives to the stock market that can produce a meaningful return.  Most of us aren’t offered opportunities to invest in real estate deals or development projects, and we probably wouldn’t be comfortable having a big chunk of our money invested in such illiquid things, anyway.  Bond yields are low, and banks pay next to nothing on CDs.  So where else are you going to put your money?  This reality suggests that basic, brute economic forces are going to continue to make the stock market a preferred investment option for people and businesses, not just in the U.S. but also abroad.

But you’ve got to recognize that the stock market is a long-term investment, and it’s going to be a roller coaster ride.  When you’re on the coaster, it’s pretty hard to get off on the highest hill, and you don’t want to exit the car and move onto the tracks at the bottom, either.  You just hold on, scream when the cars start that big downward move, and feel your pulse racing until the end.  Or, you can simply close your eyes, recognize you’re on the ride and there’s not much you can do about it, and focus on other things until your circumstances make you a short-term investor and there are true decisions to be made.

Who knows what this current jittery period will bring?  It’s time to hang on tight.

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Hard Times And Hardship Withdrawals

CNN has a story about hardship withdrawals from 401(k) plans reaching the highest level in 10 years during the second quarter of 2010.  Fidelity Investments, which manages $844 billion in retirement funds, disclosed that, as of the second quarter, 2.2% of 401(k) participants had made hardship withdrawals over the past 12 months.

I’m not sure how many inferences you can draw from a rise in hardship withdrawals, but the increase clearly is not good news.  Anyone who takes a hardship withdrawal is not simply raiding their retirement fund and thereby decreasing their retirement security.  Hardship withdrawals also come an an enormous price — by some accounts, up to  40 percent of the amount withdrawn — because federal and state taxes are levied on the amount and a 10 percent penalty is imposed as well.  If you assume that people tend to behave rationally when it comes to their finances, then you have to conclude that anyone who would take a hardship withdrawal from their 401(k) plan must be desperate and have no other options.

One of the individuals quoted in the article linked above noted that 2.2% is a relatively small percentage and that the vast majority of 401(k) participants therefore are not taking hardship withdrawals.  That is of course true, but it also is likely true that people who have 401(k) plans with sufficient funds to be the subject of hardship withdrawals are the most prudent, careful savers.  (Although it is not clear how many people have saved for retirement, recent surveys indicate that 27 percent of Americans have saved less than $1,000 and less than half of Americans have more than $25,000 saved to fund their retirement years.  If you have less than $1,000, you probably aren’t going to take a hardship withdrawal because, even if you withdrew your entire fund, the amount left for you to use after taxes and penalties would be negligible.)

If even the most careful savers are so desperate that they need to take hardship withdrawals, rather than reducing their annual contributions or taking a loan from their saved amount, it indicates that times are tough, indeed.