401K' nockout!!! Down for the Count?

February 4, 2009 — 1,307 views  
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2008 will go down in history as the worst year on record for individual retirement account performances. Most 401k retirement plans and IRAs were down 40% on average for the year. Many retirement accounts that were heavily weighted in international funds performed even worse. Most international funds finished down more than 70% for the year and a majority of energy funds finished down 50% for the year. Just take a moment... Realize the market erased all the gains that were created in the last 10 years in one year.

Why didn't Wall Street warn anyone that the market was going down? It still amazes me to this very day that major Wall Street firms upgrade and downgrade stocks and sectors, but they could not save themselves. Bear Stearns, Lehman Brothers, Merrill Lynch, Wachovia, Washington Mutual, and countless other financial institutions have failed in this debacle. Why didn't they downgrade themselves to an under perform or sell rating? The reason is simple and it's Wall Streets dirty little secret. They simply have no clue about the markets and really don't know anything but selling their services. They only have one bias and that is the greed bias. Most of the mutual funds are structured to charge fees and tell the investor to average in or dollar cost average for the long term. What about the baby boomer's that are planning on retiring this year and next? How can someone make up a 40% loss that occurred in a single year? In fact, the only mutual funds that were positive in 2008 were bear funds or the Madoff Fund. These are funds that invest on the market going down instead of up. It is what traders call short selling. Unfortunately, most 401k investors have never shorted a stock and don't even know that this type of investing is even possible. Then again, why should they? Wall Street mutual funds still generate their fees regardless of what the market does. Can you imagine paying someone to lose ten years worth of your savings? It happened all last year. Then Wall Street says, don't worry you are in it for the long term. What about the baby boomer's who don't have a long time to wait? What happens if this lasts until 2015 or longer? These are questions people need to ask themselves.

Oh, I forgot the new stimulus plan is going to bail everyone out. This will be the third stimulus plan since President Bush's first term and it will just cause this country more debt. It looks like the first two stimulus plans worked out really well. Don't forget the bailouts of AIG, Citi Bank, the automakers and countless other financial institution that are using the TARP. Who is paying for all these bailouts anyway? Isn't it the taxpayer who is going to pay? What is going to happen to the U.S. Dollar as it becomes so diluted? What happens to the current retired individual's purchasing power? What happens to the baby boomer that was planning on retiring? Again, these are the questions people need to ask themselves.

The stock market is now back to the same levels as it was in 1997. Are housing prices back at 1997 levels? Are food prices back at 1997 levels? Are gold prices back at 1997 levels? Are energy prices back at 1997 levels? You get the picture. The answer to all these questions is a simple NO! If I hear one more time that the markets are out of the woods and the new President is going to fix this mess I have news for you, not anytime soon!

The beauty of the American financial system was the fact that the market could go into a recession. Believe it or not recessions are healthy. They allow the system to clean out by getting rid of the excesses. Yes, times are tough for many during recessions. However, it allows the markets to get a fresh start and resolve the problems until the next overheated mania. It is called peaks and troughs. The problem today is simply an excessive peak after an 18 year bull market(1982-2000) that was never allowed to have a correct recession. The market moves in extremes like a pendulum that moves from one side to the other and takes time to find the mid point. In the 1990's the market moved to new all time highs as the dot coms and anything technology was being bought by the public. In the year 2001 the tech bubble burst and the 9-11 tragedy took place. The economy was going through as tough recession and then Fed Chairman Greenspan lowered the fed funds rates to 1% sparking the next bubble, this time in housing. The housing bubble is much bigger than the prior tech bubble due to the fact that most investors and traders could only borrow 50% from their broker to buy stocks(Reg T). In the housing market borrowers where in many cases allowed to borrow more than the price of the home. In many cases 125% loan to value. Also, many borrowers were not even qualified to own a credit card let alone a home. Can this problem be solved with another stimulus check? Of course not. What about the rising unemployment? Oh, I forgot the government is going to rebuild the roads in the country. That didn't work in the 1930's and it's not going to work now.

This crisis will take time to resolve itself. The more government intervention, the longer it will take. We believe that a first quarter or even first half rally is very possible. However, the second half is likely to be very tough. How can doing more of the same be any good. You can only patch up a flat tire so many times before it rides on the rim of the wheel and rips the tire in half. This tire(economy) appears to be on it's last tread.

Source: Nicholas Santiago,

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