How should a 60-year old be investing in a 401k account?
Unfortunately the power of investing lies in the value of time. The stock market is an extremely turbulent animal. Over long periods of time one is practically ensured a return exceeding inflation. Over a period of a few years, however, things are far less certain. Assuming that one is looking to retire in five years or less, that does not give enough time to invest in stocks and expect to have at least one’s original investment at 65 with any great certainty. The current status of the stock market, having risen a great deal over the past two years, also does not appear to be a good entry point.
If one is able to put the money away for a longer period of time, say 10 years or more, the risk is reduced somewhat. During the last decade the stock market was essentially flat, owing in part to the large build-up before the dot com bubble burst in the early 2000’s. If one had been investing regularly, however, rather than simply dumping a large sum of money into the stock market in the early part of the century, one actually would have ended up with a significant positive return. Ironically, the best return would have come because of the market crash in 2008. By allowing shares to be purchased at values well below their intrinsic value, one was able to generate a spectacular return over the past two years. So, part of the answer is that investments that can stay for 10 years or longer should be made at regular intervals rather than made all at once.
The other issue to consider is how much money will be needed in the early years of retirement. Money needed in the first five years should be kept in money markets or other safe cash investments. If the principle will not be needed but additional income is desired, one could invest in investments with higher yields. Unfortunately the bond market, which is a normal place to find yields, is looking very pricey at the current time. If prices retreat in the next few years shares of bond funds could be purchased. Otherwise, one could invest in a mix of large cap stocks (which are more stable and tend to pay a higher dividend), convertible and preferred stocks, and REITs. If some sort of utility stock fund was included in the investment choices that would be another possibility. Most 401K funds have little in the way of investment choices, however. If none of these other choices are available, investing a portion (perhaps half) in a large cap stock fund and the remainder in a money market fund may be appropriate. If a bond fund is available and bonds drop in price, shares could be bought at that time to lock in higher yields.
Understand here that the value of the stocks and bond funds may well decline in value over that time. One must be willing and able to hold these funds and simply collect the interest and dividends to supplement other savings while the prices of the funds do whatever it will do. One should not expect to make a substantial amount of capital gains in this short period of time, so buying funds with the expectation of selling them and living on the capital gains is not a reasonable expectation. Over a suitable period of time the price should recover and grow.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.