Sunday, January 25, 2009

401k tips

During this difficult period, I have come across several of my young colleagues who have switched much of their 401k or 403b plans to bonds. When I say "young", these people have 25+ years to retirement at least. This is fundamentally a bad idea because those who do not intend to take out their money early and accept the huge penalty (10%), have nothing to worry about and should be concentrated in stocks. Now is the time where equities are very cheap, so you will actually be purchasing units at a very low price. When this downturn is over, and I do not know when that will be but I do believe it will eventually happen, you will fully benefit from the market recovery. Please do your research on this very important and seek the best financial advice for your personal situation.

One piece of advice that John Bogle, the founder of the Vanguard Group, says is that your percentage investments in bonds should be equivalent to your age. For example, if you are 25 years old, you should have 25% in bonds and the remainder in stocks. This is a basic yardstick to use if you are not the sophisticated investor or ignorant of how investments work.

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