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I JOINED MY COMPANY’S 401(k) plan at age 25. Now, I’m 51. Over the intervening 26 years, there have been many market cycles, recessions, bull markets, a financial crisis and countless periods of market volatility.
Still, my 401(k) is well on its way to being big enough for a comfortable retirement. How did it get there? A third of the balance came from my contributions, a third from my employer’s matching and profit sharing contributions, and a third came from investment gains. The stock market, my employer and I have proven to be powerful partners.
A recent report stated that the preferred 401(k) investment for millennials is cash. That might seem like a safe choice. But inflation has averaged 2.9% a year over the past 40 years, wiping out any return from holding cash. The two strongest wealth accumulation weapons in a young person’s arsenal are time and the power of compounding. The U.S. economy has grown steadily for the last 225 years, with only occasional and brief periods of slowdown. Not betting on this strong economic horse—by failing to invest in the stock market—is a terrible mistake.
Fortunately, I didn’t make that mistake. In addition to saving diligently, here are the three things I did right over the years:
Not all my moves were smart. I occasionally purchased individual stocks. For example, in February 2000, I bought a small tech stock at the peak of the dot-com craze. It lost most of its value over the next year. I kept the shares in the account for the next 15 years at its tiny market value. It was a constant reminder that buying individual stocks in a retirement account is a bad idea. In retrospect, that foolish investment paid off—because it helped keep me on the straight and narrow.
C.J. MacDonald is a portfolio manager with Westwood Wealth Management in Dallas and the author of Basis Points, Westwood’s market insights and commentary blog. Follow C.J. on Twitter @WestwoodCJMacD.
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I bought Nvidia in my Roth IRA at $19 a share. Buying mutual funds is certainly no guarantee of success. Neither is going full bore into company 401K plans. Ask the former employees of Enron, Lehman Brothers or G.E. what they think of 401K plans? My wife lost money in a 401K because the investment company collapsed. I had huge gains on paper in a 401K plan many years ago that evaporated by the time I was laid off. I left with a pittance.
Don’t get me wrong, I’m happy for you. I’m assuming you have a ways to go before you retire. You’re not out of the woods just yet. 401Ks are not a no-brainer!
A 401(k) is a great investment vehicle. The question is, what do you buy within it? Employees at Enron and elsewhere that got into big trouble were those who bet heavily on their employer’s stock. Mutual funds are indeed no guarantee of success. But if you have any sort of tenacity, it’s hard not to make money over time with mutual funds.