Investing in Yourself
There are two questions about your 401(k) that have to be asked in light of current market conditions: First, where do you invest if your 401(k) has taken a beating. Second, do you even bother, or do you use the money for something else, such as paying for education?
Let’s look at the second question first. The traditional wisdom has always been Not to tap your 401(k) for education, because educations loans were an available option. But with ed loans now more difficult to come by and carrying higher interest rates, your 401(k) nest egg ought to be looked at for what it can do for you now, not the future. With markets in steep decline, the best investors can hope for right now is to remain even, so if you are worrying that you might be losing out by making a withdrawal from your 401(k), your worries might be overblown. Under the law, you can borrow up to half your vested balance – up to $50,000 – as long as you pay it back within five years, without taxes or penalty, for purposes such as education. (If you lose your job, however, you have to pay the money back immediately, or it is treated as an early distribution, on which you will have to pay taxes. Moreover, if you are under 55, you would have to pay a 10% early-withdrawal penalty.) Now, that said, should you do it?
Here’s the rationale – Whether you are in the midst of a deep recession or basking in the glow of a booming economy, complacency about your job and your preparedness for your next position can be career-threatening. The U.S. and global economies have been undergoing successive waves of transformation and reformation since the mid-1970s, with each shift bringing about upheavals in hiring and required job skills. The idea of lifetime employment has died even in Japan, and a smart person understands that five jobs in a career is no longer the norm, but rather, five careers in a lifetime. That means, if you are not constantly preparing for the next economic shift, you are likely to be left behind.
In good times, with a rising stock market, your 401(k) is a good savings vehicle for retirement, provided, of course, that you have selected a good manager to grow your savings. But in hard times, or when the market is in downturn or stagnating, you should really give some serious thought to using your savings to propel yourself to the next career level. When people talk about investing, they often forget that they need to invest in themselves as much as – or more – than they need to invest in the stock markets, since it is from job growth that income growth flows – better jobs, higher wages, greater savings (if you don’t allow your lifestyle to expand to rise to the level of your new salary, or worse, beyond it).
If you are going to invest in yourself, should you use your 401(k) to fund a business? Probably not. Small business failure rates under the best of circumstances are high enough – over 70% fail to survive five years. The U.S. is over-stored, and worse, over-bought. In a down economy, where people are cutting back, does your new business idea have what it takes to get off the ground? Think hard and long before tapping your 401(k) for a business start-up. One suggestion: If you really want to look at new businesses that have a high probability of success, consider this: At the start of every economic upswing, the fastest growing business has been ice cream – Baskin-Robbins right after World War II, Ben & Jerry’s as the U.S. was coming out of the steep recession of the 1970s, and Cold Stone Creamery in the early 1990s.
Back to education. Since you often don’t have to lay out all of the money for tuition or courses at once – tuition payment plans can spread the cost over an entire year – the next question is what to do with the remainder of your 401(k) while you are waiting. Historically, financial stocks have led all sectors when an economy turns around, since lending is a precondition for investment. There are many small banks and sound insurance companies that have not been affected by the current economic turmoil, and which pay a reasonable dividend as well. Many of these are available at lower than normal multiples, and can be a good substitute for bonds. Many people retreat into bonds in a downturn, for their perceived safety, but because the rating agencies have done a poor job of assessing the risk of many bonds – especially municipal offerings – good, dividend-paying stocks are likely to do just as well.
What about infrastructure oriented stocks? Perhaps in a year or three, once the wrangling over which projects to fund and how much to spend are settled, and the court challenges over rights-of-way issues for the electrical grid upgrade and other future-oriented projects overcome the various NIMBY lawsuits that are bound to emerge. For now, use your 401(k) where it will do the most good – upgrading your education and skills – with an eye on your next career and the one after.
There are two questions about your 401(k) that have to be asked in light of current market conditions: First, where do you invest if your 401(k) has taken a beating. Second, do you even bother, or do you use the money for something else, such as paying for education?
Let’s look at the second question first. The traditional wisdom has always been Not to tap your 401(k) for education, because educations loans were an available option. But with ed loans now more difficult to come by and carrying higher interest rates, your 401(k) nest egg ought to be looked at for what it can do for you now, not the future. With markets in steep decline, the best investors can hope for right now is to remain even, so if you are worrying that you might be losing out by making a withdrawal from your 401(k), your worries might be overblown. Under the law, you can borrow up to half your vested balance – up to $50,000 – as long as you pay it back within five years, without taxes or penalty, for purposes such as education. (If you lose your job, however, you have to pay the money back immediately, or it is treated as an early distribution, on which you will have to pay taxes. Moreover, if you are under 55, you would have to pay a 10% early-withdrawal penalty.) Now, that said, should you do it?
Here’s the rationale – Whether you are in the midst of a deep recession or basking in the glow of a booming economy, complacency about your job and your preparedness for your next position can be career-threatening. The U.S. and global economies have been undergoing successive waves of transformation and reformation since the mid-1970s, with each shift bringing about upheavals in hiring and required job skills. The idea of lifetime employment has died even in Japan, and a smart person understands that five jobs in a career is no longer the norm, but rather, five careers in a lifetime. That means, if you are not constantly preparing for the next economic shift, you are likely to be left behind.
In good times, with a rising stock market, your 401(k) is a good savings vehicle for retirement, provided, of course, that you have selected a good manager to grow your savings. But in hard times, or when the market is in downturn or stagnating, you should really give some serious thought to using your savings to propel yourself to the next career level. When people talk about investing, they often forget that they need to invest in themselves as much as – or more – than they need to invest in the stock markets, since it is from job growth that income growth flows – better jobs, higher wages, greater savings (if you don’t allow your lifestyle to expand to rise to the level of your new salary, or worse, beyond it).
If you are going to invest in yourself, should you use your 401(k) to fund a business? Probably not. Small business failure rates under the best of circumstances are high enough – over 70% fail to survive five years. The U.S. is over-stored, and worse, over-bought. In a down economy, where people are cutting back, does your new business idea have what it takes to get off the ground? Think hard and long before tapping your 401(k) for a business start-up. One suggestion: If you really want to look at new businesses that have a high probability of success, consider this: At the start of every economic upswing, the fastest growing business has been ice cream – Baskin-Robbins right after World War II, Ben & Jerry’s as the U.S. was coming out of the steep recession of the 1970s, and Cold Stone Creamery in the early 1990s.
Back to education. Since you often don’t have to lay out all of the money for tuition or courses at once – tuition payment plans can spread the cost over an entire year – the next question is what to do with the remainder of your 401(k) while you are waiting. Historically, financial stocks have led all sectors when an economy turns around, since lending is a precondition for investment. There are many small banks and sound insurance companies that have not been affected by the current economic turmoil, and which pay a reasonable dividend as well. Many of these are available at lower than normal multiples, and can be a good substitute for bonds. Many people retreat into bonds in a downturn, for their perceived safety, but because the rating agencies have done a poor job of assessing the risk of many bonds – especially municipal offerings – good, dividend-paying stocks are likely to do just as well.
What about infrastructure oriented stocks? Perhaps in a year or three, once the wrangling over which projects to fund and how much to spend are settled, and the court challenges over rights-of-way issues for the electrical grid upgrade and other future-oriented projects overcome the various NIMBY lawsuits that are bound to emerge. For now, use your 401(k) where it will do the most good – upgrading your education and skills – with an eye on your next career and the one after.
