I’ve had a few people in my life tell me that they lost X % of their 401k during the (insert financial crisis).
Recently when a friend told me they lost 50% of their 401k in the 2008 time, I said: “Well you didn’t really lose anything, because you still had the stocks, and even though they were worth less, you still had the same number of stocks, so you could have waited it out?”
To which my friend replied: “That would be true if the person managing my 401k didn’t sell”.
I hadn’t actually thought about that. I mean personally most of my funds are in age based target funds, but those funds are also managed by someone, right? So is there a way to prevent someone from selling your stocks if the economy tanks? I have a pretty long retirement horizon (still in my 30s) so I can weather the storm for a bit.
Edit: Thank you everyone for the insightful answers. This really helps to clear things up
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You have control by default. If you hire a financial advisor to manage your funds, you’re giving them control but you can tell them not to sell ever and they will do what you say.
Work colleague crystallised their losses during the GFC by selling their 401k and changing the asset allocation to Cash.
They didn’t convert it back to stocks until 2018…
Reading this hurt so bad, I almost downvoted.
If it’s a “personal” one it does whatever you or the person you pay to manage it wants it to do.
A lot of it is by “shares” for company/government 401ks though.
Depending on the economy one share might be worth $20 or $200.
Some people in multi index funds will try to time it. When the market is bad they switch to the high risk index, knowing the fund rarely sells stock and wait for prices to go up. When their up and don’t think it will last, they put it in the safe but practically no interest indes.
Most people aren’t good at that.
“Lifecycle index’s” start high risk when you’re young, and slowly shift to low risk when you get close to your chosen age.
Because at 30 a crash on your 401k doesn’t matter, if anything it’s when you should max donations. But a recession the year you’re gonna retire means you keep working till your 401k.rebounds.
Target funds themselves are passively managed, which means nobody is sitting there trying to buy the bottoms and sell the tops, which is why they tend to be the least expensive in terms of expense ratios. They tend to consist of other passively managed index funds that provide broad market coverage and whose objectives are none other than to mirror the performance of a wide range of securities in a particular asset class.
If your friend’s 401k realized a 50% loss, that means either your friend panic-sold, your friend is not in an index fund, or your friend is full of shit (possibly all three).
Regardless, I would recommend not taking financial advice from your friend.
So is there a way to prevent someone from selling your stocks if the economy tanks?
You can read the prospectus that comes with each of your investments. It will describe how it is managed pretty early in the text.
Almost any low fee index fund isn’t going to be active enough to lock in losses. To my knowledge, it hasn’t happened to any of the algorithm run ones. It could happen, but it’s quite unlikely, and it would likely result in immediate legal action requiring the algorithm owner to provide some remedy to those hurt. An index should rebalance, but should never exit the market.
And while a “target retirement age” fund could technically sell early and lock in losses, that would be an actual prosecutable crime. So as long as your provider isn’t running an outright scam, with a plan to flee from the law, you’ll be fine with a target retirement fund.
