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Author: TheBreeze Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25318  
Subject: How I Started in My 401k Date: 6/27/2004 7:00 AM
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When I started at my company in 1983, I wasn't sure how long I'd stay. I didn't understand about how retirement programs worked, and didn't know if the money invested in a 401k would be lost if I left the company. So, I stuck to regular IRAs and saving for a house.

My company offered 65% matching on up to 10% of one's income. After a couple years of investigating how that sort of stuff worked, I realized the foolishness in missing out on that matching and tax break. So, in early '87, I signed up. The requirements included one where you put half your contribution in company stock, and all the matching was in company stock (hold for three years before you can invest in any available asset). Since my company had bought a couple other companies, the half of the 10% could go into any of the three. Since the matching was all in stock of the "main" company, I overweighted the 5% contributuon towards the other two to get apporximately qual amounts of all three. The other 5% went 25% to the stock fund (S&P500 index was the only one available), 25% to a US bond fund, and 50% to cash. Yes, I was risk averse. I mean, stocks can go down! Months after starting in the 401k, there was the October 1987 crash. Some coworkers complained about "losing" so much money in their stocks, and my stock-risk-aversion seemed to be confirmed.

In 1990, I read a book by Charles Givens about saving money on things like insurance, buying a home, etc. He also had a lot to say about investing. Since his company sold financial products (and advice) I knew he had an ax to grind, but the light bulb finally went on over my head--stocks can go down, but they can also go up much faster than cash and bonds. I understood dollar cost averaging. Also, 1991 brought a huge buying opportunity for stocks. Because of the risk-averse allocation--"overweighted" in cash, I was sitting pretty for this buying opportunity.

So, by 1992, I was 80/20% allocated to stocks/cash (and bonds). I also sold a lot of the company stock that had doubled and split twice in three years, and split the money between the one that had lost 66% and the one that was valued at 15% of its *book* value. (I started to read "Business Week" and other financial periodicals that frequent travelers [read on the plane] would put in the break room.)

In 1993, my company brought Fidelity on board to handle the 401k. I was able to diversify out of the one stock fund--S&P500 index--right when the S&P500 index was the best performing sector! Darn!

Lessons:
1. When there's nothing good to buy, saving your money in cash can be a good thing to allow the accumulation of an amount so that when the opportuunity to buy presents itself, there's something to buy with.
2. In 1991, I was shocked at how much I'd saved in four years--much more than a year's salary (counting the 70% matching). Put your payroll deduction on automatic!
3. Get the match while you can. We eventually got down to 25% on 6%, due to the recession. I wish I'd wised up sooner during the 65% on 10% days.
4. Don't let company stock get to be too much of your portfolio. If you can sell afer some number of years, rebalance some.
5. Being able to have greater diversification in investment options isn't always beneficial. I wish I'd kept all the stock allocation in the S&P500 index fund.
6. Even a book where you end up disagreeing with most of the information can still have some good/useful information.
7. You don't need to check your balance every day or every week.
8. My return to date is 14.4% (if you count the matching money as "gain") or 9.2% (if you count the matching money as investment contribution).
9. Payroll deduction is pretty painless. If you increase your amount every time you get a raise, you never miss it.
10. I got a lot more education and information on my own than I got from my company. Plus, the company 401k newsletter is full of legal-speak, "An investor may want to consider the possibility of maybe possibly thinking about the possible effect of..."
11. Seeing my possible pension amount, I'm really glad I didn't wait to get started. I might be able to retire at 55, making up for the reduced pension amount with my 401k money.
12. RESULT = WHAT YOU PUT IN x RATE OF RETURN x TIME. I'm glad I started early and let time be on my side.
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