Over my 20 year career in human resources, I have tirelessly promoted my employer’s 401k plan as a valuable employee benefit. Unfortunately, many employees refuse to participate. When asked, these employees confess that that they consider investing in the stock market akin to gambling. They hear news reports of spectacular gains in a stock or the overall stock market and then, a few short weeks or months later, they hear the new report just as spectacular losses. To them, these reports paint a picture of market increases, then decrease, then increase again in what appears to be an unpredictable, random pattern.
Some of these employees are actual gamblers, spending time at the local Indian casinos or weekend trips to Las Vegas. These employees know what gambling is. Many others are not hard core gamblers, but nonetheless still consider investing in stocks risky business. The effect is that many of my co-workers refuse to participate in our 401(k) plan – even given the favorable tax treatment and a company matching contribution. Others have confessed to me that they don’t defer any money into their 401(k) account that they cannot afford to lose.
I understand their conclusion. I am not a market “timer.” I agree that predicting what will happen with the value of stocks in the next 3 to 6 months is impossible. However, I do know history. That knowledge has given me a high level of confidence that, given enough time, I fully expect my stock based mutual funds in my 401(k) plan to be worth more – substantially more when I retire. Buying shares in a well run stock based mutual fund then, isn’t gambling. That is investing. Even though the value of the stock market may drop in the short term, the overall trend has been up. I count on that continuing.
For example, consider how difficult it is to find any ten year period where stocks did not increase in value. I can quote statistics, but instead of telling you – I recommend that you go and look for yourself. Simply do a quick internet search for stock market performance charts. After you have considered ten year investment periods, try to find any twenty year periods where stocks have failed to increase in value. You can’t.
Investors, especially investors in 401(k) accounts who have years to go before retiring should consider this before ignoring their 401(k) plan. Putting money in a well managed stock based mutual fund in an employer sponsored 401(k) plan is about as close to a “sure thing” that one can get – provided that history keeps repeating itself and there is enough time for that investment to grow.
However, you can’t just invest and forget. You need to make sure your 401(k) plan is reasonably acceptable (low or no fees, company matching contributions, acceptable mutual fund offerings, etc). Although there are some truly horrific 401(k) plans out there chances are, the plan your employer provides you can be used to build retirement wealth for you if you use that plan appropriately.
You also need to keep an eye on the actual stock based mutual funds you invest in just in case there are significant changes in the mutual fund’s portfolio, the management or the mutual fund’s performance relative to the overall market. Above all, you need to make sure that you can allow time to work on your behalf. Unless history stops repeating itself you will prosper.
I attribute my own investment success, especially my success at investing in my 401(k) account to learning how to invest in well run mutual funds and giving those skilled managers time to create wealth for me. That’s not gambling. That’s investing!
Copyright © 2009 by Jeff Brownlee
Jeff Brownlee is a former Human Resources Executive, who after more than 20 years in industry, now concentrates on helping people create wealth through the most prevalent tax advantaged retirement vehicle available for working Americans – the 401(k) plan.
Jeff developed and follows his own investment methodology which is specifically geared to be used within the limitations of a 401(k) plan. Since 2003, Jeff’s personal performance in his 401(k) account has exceeded the performance of the S&P 500 index by a full 40 percentage points (through November 13, 2009).