401(k) Fool
20-something wonders if her generation has been hoodwinked
I believed in my 401(k)the way a kid believes in Santa Claus. Those enticing investment graphs angling ever upward, those sages solemnly swearing on stocks' long-term dominance, those admonitions that the $2 cup of coffee I skipped each morning would magically morph into the down payment on a beachfront villa for my twilight years--I bought them all.
Fresh out of college in the late 1990s, in the middle of the Internet boom, I siphoned off a slice of my salary each month and settled in to watch my tiny nest egg expand. For a couple of years, my faith was rewarded; my contributions, the company match, and a skyrocketing market began adding up. At this rate, I figured, I'd have that beach house by 50, easy.
But faith is a fragile thing. Last year, scanning my third-quarter 401(k) statement--which showed many consecutive months of loss, and double-digit negative rates of return that ate not just profit but principal--I snapped. Is it possible, I wondered, that I've bought into a colossal sham? If this is the worst bear market since the Depression, is everything we now think about stocks (all that long-run, buy-and-hold stuff) just a load of 20th-century hogwash?
Understand, I'm aware that this gen X predicament is, in some respects, enviable. Retirement-age investors whose sizable portfolios have been significantly slashed in the recent downturn clearly have far more pressing concerns than those of us who have decades to save.
Nowhere to turn. Still, those monthly debits are no small sacrifice. And recent grads typically leave college with $17,140 in student loans, on top of $3,962 in credit card debt--which leaves even less cash to stash away in a losing portfolio. Surely, a 20-something who wants to save for retirement but has soured on stocks could find somewhere else to turn.
Not really, it turns out. Financial planners I spoke to almost uniformly advised me to stick with the market. Most tried consoling me with the idea that history is on my side, trotting out sentiments from the boom market's buy-and-hold bible--Jeremy Siegel's Stocks for the Long Run --and citing stats on stocks' long-term outperformance of other investments. "It's our best guess," concedes Beth Kobliner, author of Get a Financial Life. But, she points out, with 40 investing years ahead of me, even a 4 percent annual return would most likely beat inflation--which is more than I can say for my mattress or measly money-market accounts.
Yet, I wondered, what if history doesn't mean anything anymore? What if, as some have suggested, we're in for decades of downturn? Would we 20-somethings be better off waiting out the slump and jumping back in when things look better? But "no one can time the tops and bottoms of markets," counsels Steven Evanson of Evanson Asset Management.
The best nonmarket advice I got turned out to be more about spending than saving. "If you truly can't stomach the losses anymore," said Bill Arnone of Ernst & Young's Employee Financial Education and Counseling group, try paying off high-interest debt. Not the student loans with their tax-deductible interest but the 14 percent-interest-rate credit card that I used to buy my laptop last year. "You'll get a 14 percent return, guaranteed," he continued. "Nothing's paying that right now." No kidding. Yet while I love this idea, it's short term: Once I pay off the laptop, my nest egg will still be scrawny.
In the end, I find myself drawn back to the cold, hard logic of the 401(k). Though I currently have no company match, I still get the benefit of tax-free saving, and I'm taxed on less income. "Where else are you going to get a 30 percent return, risk free?" asked Jeff Maggioncalda, CEO of retirement counseling service Financial Engines. Sigh. Nowhere, I concede. So, I'm sticking with stocks. There's no guarantee my beachfront villa won't be a hut. But I'll risk it. I mean, a girl's gotta believe in something.
This story appears in the January 20, 2003 print edition of U.S. News & World Report.
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