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Misleading Brexit Media Reports

June 28, 2016

This weekend two glaring news stories about the effect of Brexit bothered me. A national news program emphasized the loss of 401k account values and the difficulty of older people to make up those losses. The second was the cover headline of Barron’s that read “How to play the markets now!” Both grossly misrepresent reality.

First the headline. I resent any implication that the markets are for play. I play chess, cards and golf. I invest in the markets to maintain and grow my assets so I will have the necessary degree of financial security. That is not a playtime activity but very serious business. The flippancy of the headline makes light of the importance of careful deliberate thoughtful investing.

The news reports I heard were “calculations” of the average loss in 401k account values and an admonishment that older people might not have time to make up these losses. This provides a terribly wrong impression that I want to address.

  • There are three types of 401k owners. 1) Those that are still working and making contributions. 2) Those not working or who have dormant accounts waiting until they will start distributions. 3) Those that started annual distributions.
  • Those that are still working or who have dormant accounts are making new contributions and/or are reinvesting their dividends. Why would those still investing in the stock market want the market to be higher? Isn’t it better for them that the market is lower so they could purchase more shares with their contributions and reinvested dividends? Why would they want the prices to be higher? When you go shopping for a car or a pound of meat, do you walk into the dealer or butcher hoping the price increased?
  • Those that are receiving distributions had their account values reduced, but their 401k account should be invested in a way that will last for the rest of their lives, and then some. It is not realistic to expect the market to stay the same or only go up. The ups and downs should balance out on the upside over long periods. [If you don’t believe that, then get out of the market.] The only irreversible loss occurs when shares are sold to provide cash for the distribution and then it is only for the shortfall between that year’s required minimum distribution and dividends received; and this can be mitigated by advance planning of the cash flow for the distributions.

Dropping values are upsetting but in reality they do not cause much harm. Retired people live off dividends and minimal principal liquidations. The non-retired are active investors building their portfolios and should welcome reduced prices. Logical? Of course! Upsetting? Very likely! However, investing, if anything should be logical and according to a plan and devoid of emotional responses to current events.

This blog also applies to IRAs, money purchase retirement accounts and your other financial investments.

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