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Should I Stop Contributing to My 401(k)?

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Having just been brutalized by the stock market, you may be wondering whether or not you should stop throwing good money after bad by contributing to your 401(k). It may go against your gut, but now is exactly the wrong time to stop putting money into the stock market. Don't believe me? Ask yourself the following question:

When you're a net buyer, do you prefer to pay more or less?
That's not a trick question. Allow me to hand over to Warren Buffett, who'll explain how it is relevant -- as he did in his 1997 shareholder letter:

"If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? ... Even though [investors] are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. ... Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

In other words, if you halt your contributions now, only to resume them when the market has stabilized, you're effectively saying that you are only comfortable paying higher prices for stocks and that you would never want to take advantage of lower prices. Does that sound like the smart course of action?

Looking for a bottom?
"Ah," you counter, "But I don't want to resume contributions when stocks are higher, but rather once they've bottomed." Unfortunately, it's a pretty good bet that you don't have any particular skill in timing market bottoms -- that's unlikely to prove to be a winning strategy. You're better off relying on regular contributions that take advantage of today's lower stock prices. Take a look at the following table:

Stock

Current Stock Price (10/10/2008)

Stock Price 2 Months Ago (08/08/2008)

Loss

Pfizer (NYSE: PFE  )

$15.14

$19.84

(24%)

Visa (NYSE: V  )

$52.00

$72.50

(28%)

Starbucks (NYSE: SBUX  )

$11.08

$15.12

(27%)

Microsoft (NYSE: MSFT  )

$21.50

$28.02

(23%)

ExxonMobil (NYSE: XOM  )

$62.36

$78.32

(20%)

Hewlett-Packard (NYSE: HPQ  )

$37.00

$45.74

(19%)

Petrobras (NYSE: PBR  )

$26.10

$51.06

(49%)

Is the world the same as it was two months ago? No. Does the deterioration in the credit crisis merit a downward revision in stock prices? Assuming they were fairly priced initially, yes. Does it warrant lopping off a fifth, a quarter, or in the case of Petrobras, half of the market value? I certainly don't think so.

I'm not specifically recommending the purchase of these stocks, but I think there is strong evidence that many stocks are now trading at fire sale prices and are, in fact, compelling bargains. Continuing to make contributions to your 401(k) will allow you to get in on them.

More Credit Crisis Foolishness:

What now? The Motley Fool is here to answer your questions about this financial crisis. Send us an email at AsktheFool@fool.com, and check back at Fool.com as we answer your questions and cover the latest on the Panic of 2008.

The only protection in this market is to be invested in great franchises with bulletproof balance sheets. Those are the only businesses Philip Durell and his team at the Motley Fool Inside Value newsletter are interested in. To find out their latest recommendations, take a 30-day free trial today.

Alex Dumortier, CFA has a beneficial interest in Microsoft, but not in any of the other companies mentioned in this article. Pfizer and Petroleo Brasileiro are Motley Fool Income Investor recommendations. Starbucks, Pfizer, and Microsoft are Motley Fool Inside Value recommendations. Starbucks is a Motley Fool Stock Advisor selection. The Fool owns shares of Starbucks and Pfizer. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 14, 2008, at 5:07 PM, DaHombre wrote:

    I agree - I've been telling people in my office not to stop - remember each month we actually get more shares then we did in the past and when the shares raise in value we will gain from it.

  • Report this Comment On October 15, 2008, at 5:37 PM, tradingmarkets wrote:

    Fair price? I think DOW at 1500 is fair price. What do you think? Why should I buy a share in a company when their divident is less than bank interest and will remain to be that way for the foreseeble future?

    Your answer is "Stock price will grow!!" And my answer to that is: "Why should it grow higher if dividents are not growing?"

  • Report this Comment On October 16, 2008, at 11:39 AM, TMFAleph1 wrote:

    1,500 a fair price for the Dow? That's less than 2 times earnings and just above one times cash flow. You're joking, aren't you?

    Alex Dumortier (XMFMarathonMan)

  • Report this Comment On October 21, 2008, at 3:17 PM, liberty41 wrote:

    Yes of course. The government could nationalize the whole system tomorrow. They already nationalized the banks. You cannot invest in a socialistic government. They will take what they need when they need it and that could be your money.

    For heaven's sake, read this simple article:

    http://www.lewrockwell.com/orig8/hamilton6.html

    But only if you don't want to lose your shirt.

  • Report this Comment On October 22, 2008, at 12:04 PM, richardhendricks wrote:

    Actually, I raised my contributions to 20% about a month ago. Ironic part is that I've now hit the 15.5k limit and can't get in on any of the cheap stock lovin' going on. :(

    I make too much for a roth or traditional IRA, so I'm going to take the additional take home and stick it in my taxable account.

  • Report this Comment On October 24, 2008, at 2:45 AM, Shaman33 wrote:

    I won't invest in stocks again until these 3 things happen:

    1. Jim Cramer is off the air.

    2. CNBC drops to the bottom of the ratings.

    3. TD Ameritrade goes bust.

    Too many people are still WAY TOO BULLISH!

    Capitulation is probably a year off!

    Get out while you still can!

  • Report this Comment On October 24, 2008, at 1:23 PM, Melancoholic wrote:

    Why would you contribute more into a sinking investment? "Oh, because I'll get more shares for my money for the upswing." you say.

    You'll get more shares, but your overall money pool is shrinking as your 401k deflates.

    A far better strategy is to move all your current and future contributions for your 401k into the most stable fund possible. Even if the gains are less than 1% it is all about CAPITAL PRESERVATION at this stage.

    All the talk about not being able to time the markets? Please. A good investor will know when we are back in a growth cycle because of the market health, not because of index spikes due to volatility.

    Preserve your capitol, then move it back into growth funds when the time is right (I predict late 2009). You'll be in a much better spot than the people who left their money in a shrinking fund.

  • Report this Comment On October 25, 2008, at 12:49 PM, SteveTheInvestor wrote:

    This might be the time to start moving regular contributions to stock funds, so as to average into this crash. The lion's share of your portfolio needs to be in cash though. As your portfolio grows, capital preservation needs to be the primary focus. Where to invest your next $100 is a petty concern compared to what is happening to your $100K portfolio.

    I started moving to cash in my 401K last year. At this point I'm about 60% cash (Stable Value/GIC) and 10% bonds.. Obviously, I now wish I had moved 100%. I still may move another 10 or 20%, even at a loss.

    What I have done though is up my contribution by 2% and have directed all money into stock funds. As the market continues to crash, as I expect it will, I will keep buying at lower and lower prices. The largest part of my funds are out of the market for now though. The market is simply too risky and I can't leave all my money exposed to huge losses.

    The market is not going to improve any time soon in my opinion. There is still a lot of deleveraging that needs to take place. Add to that a sinking global economy and recession and we are just about out of reasons to buy large quantities of stocks.

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Alex Dumortier
TMFAleph1

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

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Related Tickers

10/24/2014 2:00 PM
HPQ $34.83 Down -0.11 -0.31%
Hewlett-Packard Co… CAPS Rating: **
PBR $13.08 Up +0.97 +8.01%
Petroleo Brasileir… CAPS Rating: ***
PFE $29.19 Up +0.59 +2.06%
Pfizer CAPS Rating: ****
V $213.21 Down -1.07 -0.50%
Visa CAPS Rating: ****
XOM $94.25 Up +0.14 +0.14%
ExxonMobil Corp CAPS Rating: ****

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