To say that the market activity of late has been exciting is, I think, a bit of an understatement. In fact, maybe exciting isn’t the term that most people are choosing to use right now. Maybe terrifying is a more appropriate term.

Today marked a truly historic moment for our country (and many records have been broken as of late); the Dow Jones Industrial Average (DJIA) dropped a staggering 777 points, which was the largest single-day points drop on record! This is an even steeper drop than what Wall Street experienced the first day the market opened back up after the attacks of September 11th (which was around 724, I believe).

Well, as you can certainly imagine, people are starting “freak out”. And you may be one of them.

Personally, I’ve had numerous calls from friends and relatives asking me what they should do with their retirement accounts. Should they get out of their equity funds, stay in, or what? “I’m losing money!”, they say.

While I typically tell people that they need to stand pat and do nothing, I can’t necessarily say that is the absolute best move for everyone. My time horizon until retirement is much different from my parents. So staying put will make sense for me, but not necessarily for those that have less time on their hands to ride out these declines (there’s just no telling when they will bounce back and how long it will take when they do).

Personally, I’m taking these steep losses as an opportunity. I now have the opportunity to buy many of my investments at a dirt cheap price (well, not dirt cheap, but you get the idea). Since I won’t be selling my investments, I won’t actually be incurring a realized loss. Until I do, my losses are “paper” losses, not actual losses.

I would like to tell everyone to do the same, but I can’t. One of the major factors in determining a person’s asset allocation is their personal tolerance for market swings, regardless of how long that person has before retiring. If a person loses sleep at night over the losses in their 401(k) account even though they are only 24 years old, then maybe they need to invest more conservatively.

But before you starting dumping all your investments into a money market (and frankly, inadvertently adding to the panicky sell-off and contributing to the whole mess) consider these two things:

1) Instead of dumping your current investments and realizing whatever losses you have incurred in your account, consider just redirecting future contributions to a money market fund, and leaving your existing dollars where they are. At least you’ll have some peace of mind that your future contributions have some protection. This might be a way to balance out your portfolio without realizing a large loss.

2) This is most important, I think. Let’s keep this “Largest One-Day Decline” thing in perspective. Sure, it was the largest one-day point , but not the largest one-day percentage drop. There is a BIG difference. The 777 point drop equated to just under a 7% decline. No small potatoes, for sure. But look back to the market crash in the late 80’s where there was a single day plummet of about 20%! A 20% decrease by today’s standards would have been around 2,200 points, instead of 777.

My point is this: The market recovered from a devastating 20% one-day decline and then subsequently moved into the 90’s which was one of the best decades of the stock market. If we can do that, we can certainly recover from a one-day loss of 7%.

Sure, I’m oversimplifying. I have no idea what tomorrow will bring, or the day after that. I also have no idea how long it will take for the market to bounce back. But there’s one thing I’m sure of: It WILL bounce back. By not selling my investments and ultimately purchasing them at the low prices right now, I put myself in a great position for shooting ahead of those who decided to bail at a critical time.

Only time will tell, but I know that I can still sleep soundly tonight.

I’ve recently had a conversation with a buddy of mine who has a new job where he makes quite a bit of money. All of a sudden he is in a quandary when it comes to saving for the future. He maxes out all of his retirement vehicles (401(k)’s and IRA’s) and has now begun investing in taxable accounts. He can’t figure out how to invest in a tax-deferred manner since he’s used up most of his options already–at least for the remainder of the year (there are some other obscure options he has, but we won’t go there).

Having a nice big pool of non-taxable money available for retirement would be ideal, but Roth IRA’s are entirely out of the question. He and his wife make much more than the imposed limit to contribute to a Roth, so investing in nondeductible IRA’s are the only way for him to go.

There is a way around this, though.

Starting in 2010, Congress has opted to remove the income limit on CONVERSIONS from a traditional or nondeductible IRA to Roth IRA’s. While the income limits still apply to direct contributions, they will no longer apply to conversions (unless Congress puts their filthy paws on the laws again).

So, in 2009, anyone who makes too much to contribute directly to a Roth IRA can make their maxed out contribution to a nondeductible IRA. Then, when 2010 rolls around, you will be able to initiate a conversion to a Roth IRA (that can still count to 2009). By doing so, you’ve now just set yourself up with the ability to build a pool of non-taxable money for the future.

Keep in mind that you will be required to pay taxes on the proportionate amount of earnings upon the conversion. But if you’ve only had the account for a relatively short period of time, this will probably not be a big problem.

Let’s a give a BIG thank you to the guys at the capitol for making this possible. THANK YOU!!

Yesterday, on September 15th, 2008, the stock market witnessed the largest one-day drop in 7 years. The last largest one-day drop occurred on September 17th, 2001, the first day the stock market reopened after the terrorist attacks on September 11th.

Hopefully, this isn’t a sign of things to come. Though, ,no doubt, this drop frightened many people out of the market, causing them to sell at (probably) low prices. If anyone out there reads my blog, they will know that I am big proponent of sticking it through the good times and the bad. This is definitely one of those bad times, and it may very well get worse before it gets better. But I’m sitting still. If anything, this is a great time to starting buying, not selling.

Are you sitting still? Are you planning on getting out? I’d love to hear your comments and thoughts on the most recent events. Let me know what you’re doing!

Should You Contribute to a Roth 401(k)?
Does your employer offer a Roth 401(k) option? Are you confused about whether you should contribute or not? This video will show you exactly who should contribute and who shouldn’t.

A settlement was finally reached in the Enron debacle case, which will award $7.2 billion (yes, BILLION) to investors and shareholders that held Enron stock in the midst of its tragic collapse in 2001. This is the largest settlement in U.S. history.

According to the report, institutions who were accused of playing some role in Enron’s downfall will pony up the dough. This includes $2.4 billion from CIBC, $2.2 billion from JPMorgan Chase, and $2 billion from Citigroup. And yes, even Arthur Andersen had to throw something into the pot, but it’s a much smaller amount.

According to the settlement, shareholders of common stock will receive an average of $6.79 per share, while holders of preferred stock will get an average of $168.50 per share. While I have no way of knowing whether this amount is sufficient enough to reimburse all the people who lost their life savings (and I’m sure it’s not), we can at least say that justice has been served somewhat.

I’ve always considered the Enron debacle a travesty in the retirement world. The story of a corporate giant who fed on the lack of investment savvy of its workers and “stuck it to them” in the end. It’s really a shame. It’s the example I use when I tell retirement investors to tone down on the amount of company stock they hold in their plan.

I do hope that they many individuals who lost their life savings will find some reprieve as a result of the settlement. And to the many of you out there who invest in your company stock, don’t let yourself ever become a victim of something similar to Enron. Diversify, diversify, diversify!

Take care,
Ryan