If a fund in your 401k is performing negatively, does it make sense to temporarily lower the contribution?

Question

Go easy on me - I'm new to the world of investing.

In my 401k there are various funds, of which I can peridocially monitor the progress of. When I log into my account, I can change the individual contribution rate to each fund at any time for no charge.

Anyhow, if I see a fund in the red (performing negatively currently) would it make sense to LOWER the current contribution, until the percentages start going positive? The logic (possibly flawed) being that a fund will rarely make a weekly positive-negative-positive-negative zigzag, but will instead continue to slope in one way or the other for a limited time. Skewed logic perhaps, but like I said earlier, I'm new at this stuff. So would it make sense to LOWER the contribution to a fund in red, until it hits positive and starts climbing again?

I'd appreciate some advice. And please, go easy on me here... :)

Answer 1

Basically a general rule of thumb for any type of investing is, when the price is low invest more. When the price is high invest less.

If you are contributing into a fund that the value is going down in, then now is the time to start investing more money.

By investing money on the downward curve over and over again when the funds start to rise you will generate earnings faster.

Answer 2

You should keep contributing. One reason is the tax advantage. If you keep it, you lose 25%-35% right off the bat due to taxes. Even if your 401K is losing 10%, you are still ahead.

Second, you can change your plan. If you feel that the fund you are in is going to continue to lose, you can switch your money into a less risky fund that will preserve your capital.

Third, markets do turn around. Everyone says "Buy Low and Sell High" -- here is your opportunity to buy low. Even if markets go lower for a little while, you still get a good price compared to buying after the market takes off. It isn't like you can hold on to your money and invest all of it at the bottom -- because there are limits to how much you can contribute.

Answer 3

Tough call.

I would do the reverse and increase the contribution for the downward slide. My theory is that when a fund goes negative it means that it is cheap. When the fund recovers you will have more units bought at a lower price. Calculate the average price for the units that you have bought. If buying more units now means that you will lower the average price for your units then go for it.

The assumption is that the portfolio basically is sound and at the moment the price is depressed by interest rate jitters and that middle east.

The people who made money out of the crash in 1929 bought after the crash. Stocks were low priced and when the market recovered to it's former levels they made fortunes.

I am trying to scrape money together now because the market is so down.

Answer 4

One thing great about a 401k is that there is no tax penalty or trading costs for switching in and out of your fund choices. So you have considerable freedom in choosing your asset allocation, without regard for tax penalties (capital gains tax) or trading fees.

That said, I don't think there is a general answer to your question. As others have pointed out, if it is a solid fund, low prices offer a buying opportunity. The answer depends upon the fund. For example. let's say your company offers a real estate fund, and it hasn't been doing well lately. Should you switch out? It depends on how you view the future of the real estate market. If you think real estate is overvalued and due for some losses, then it makes sense to discontinue your contributions. On the other hand, if you think that real estate will show long term gains, then stay in.

You have to realize that your investment strategy for a 401k is quite different from a regular brokerage account. Your horizon is long term; choose funds that are solid long term performers and stay with them. That's my advice.

Answer 5

Congratulations, you're starting to think about your investments in a pretty sophisticated way.

Obviously, you have to ask why the fund is doing poorly. Does it have really high expenses (dump it all and move to another fund), does it have a track record of trailing its benchmark, indicating that it's just a bad fund (dump it all and move to another fund), is it in a market space that probably isn't right for you given your assets and situation such as precious metals funds or commodity funds (dump it all and move to another fund) or is it in a worthwhile space such as domestic equities that you HAVE to be in but it's just had a bad run or the fund has just had some bad performance despite healthy historical results.

What to do once you figure that out is just as important as figuring it out to begin with. If you make certain that your total asset allocation makes sense then maybe you don't want to make any changes. If the fund/asset is good but beaten down then maybe (ATTENTION: CONTRARIAN ADVICE COMING, FOR ADVANCED INVESTORS ONLY) you want to increase your allocation. If you'll sleep better at night by lowering your allocation then do that.

Read all you can about investing. Money magazine is a good resource for beginners but eventually you'll outgrow their advice.

Good luck

Answer 6

study your 401k regulations...If i'm no longer flawed...you could borrow out of your 401k for the objective of your 1st very own loan purchase (for downpayment of direction). So, you do no longer would desire to cut back your contribution. And in case you may elect to borrow against your guy or woman 401k...locate out what the cost could be and the words inclusive of 365 days, 24 months, etc. in case you borrow, the cost plan would be payroll deducted yet you have the choice to elect all the above. You do have a call. seem into it first for suggestions, then come to a determination. solid plan the two way.

Answer 7

It depends on your age and when you want out of the market. If you can ride out the volatility in the market place for the long term you will be fine. And, if your company is matching your contribution, it is like receiving free money. I would say keep dollar cost averaging and in time it will grow.

Answer 8

Good advice from the others.
The funds are "on sale"

Answer 9

it makes sense to me, we are new to this too, I guess we need to check our accounts.