As the economy has turned south, I've been asked if I think it is a good time to cut back on retirement plan contributions. A friend recently moved all his retirement account investments into bonds. Investors pulled out of mutual funds in September in greater numbers than in any time in the history of the mutual fund industry. What is an investor to do?
I have a long time horizon until retirement, and I can leave my taxable investments in the market for a while. So I am following Warren Buffet's lead and am buying.
I'm doing four things.
1) I'm re-balancing my retirement account to be 100% Equities and increasing my small cap growth and large cap value investments.
I was already 90% invested in equities so this is not a huge change. I moved out of bond funds, which have certainly cushioned the decline in my retirement account. And I'm moving funds from an S&P 500 index fund into Dodge and Cox, a Large Cap Value managed fund. I have many years to go before I retire so even if markets decline further, I think being 100% in equities after 30-40% declines year to date, is a good plan for the long term.
2) I'm increasing my contribution to my employer based retirement plan (see above) from 13% of my salary to 16%. This is also not a huge change, but the more money I can invest while the markets are down significantly, the better.
3) I'm going through my taxable account, and looking for funds that I can sell at a significant loss. I will immediately reinvest in another fund in the same category, as I feel good about the asset allocation in my taxable account. But by selling at a loss and reinvesting, I maintain the same exposure to equities, I have a chance to replace funds that are not performing in line with peers in their categories, and I get to offset the loss against my income come tax day! I'll write a post with details about this soon.
4) I'm looking for cash to invest. Since I'm increasing my retirement contributions, my pay check will decline slightly. I have an emergency fund and though I already live comfortably below my means, there are ways I can cut back and save even more. So I'm looking to see if I can find cash to invest without depleting my emergency fund. More about this soon as well!