Tuesday, September 30, 2008

There have been people who have struck it rich in the market when others were losing their shirts and shorts and socks and... So who is seeing big returns right now? Someone has to be, right? Maybe they're just keeping their mouths shut because it would be imprudent to boast at a time when their colleagues are tearing their hair out...

Here's what I want someone to splain me: Say I make incremental payments into a 401K and as of January 1 this year, I had a balance of exactly $100,000. Let's be modest and say that as of today, my 401K's value is now $75,000. I put $100,000 actual value dollars in the account, so where did the $25,000 go? It had to go somewhere. Did it pop up like a carbuncle in someone else's account?

Answer me this in lay terms, and I'll send you a dollar.

8 comments:

Liz said...

It went away. Think of it this way: you buy a house, it goes up in value. You sell your 100K house for 125K. That extra 25K did not come from someone else's "account", it's just an increase in value. Similarly, if the value of a stock goes down, that money evaporates. Just like a house, stock is only worth what people will pay for it. It goes up when people keep buying regardless of how high the price is. It goes down when people keep selling regardless of how low the price is.

Anonymous said...

Delurking to take a crack at answering your question. What your investment's worth depends on what you bought with your money. If you bought $1000 in gold in 2004, it would probably be worth more today than if you bought $1000 in John Kerry campaign signs. If the folks managing your 401K kept what you gave them as cash, it'd be unchanged. Since they probably used it to buy stocks, bonds, or funds, it's now worth what a willing buyer would pay for those stocks, bonds, or funds.

In the race to generate profits, financial institutions have come up with clever "things" they can buy and sell, such as the interest from home mortgages. Since these investments are indirectly related to the real world (you're not buying Mr. Smith's mortgage, you're buying the profits from the interest on thousands of mortgages), it's difficult to know for sure what they're worth. To make matters worse, the folks who do know wouldn't tell you if that fancy investment is going bad...they'd try to sell it to you instead so they didn't have to take a loss. Since none of the investment houses (banks, brokerages, etc.) wants to get stuck paying top dollar for trash, the price of these fancy investments starts to fall.

So, if that $1000 was used by your 401K manager to buy one of these fancy investments, there's probably no one out there who's fool enough to pay $1000 for it today.

Keep the dollar, even if this helps. At least it's worth a cup of coffee some places.

MJ (don't have a website or an blog)

John B said...

You Was Robbed!

Rob K said...

You shouldn't look at your 401(k) like a bank account, you should look at it as a box of stocks. You have the same number of stocks in there as you had before, it's just that people won't pay as much for them right now. Since stocks are cheaper now than they had been, you should buy if you have the spare money, because stocks tend to increase in value.

dneylon said...

It hasn't gone anywhere. The value of your 401k is like a for sale sign on a can of beans. Right now it's on sale at 25% off. Next week it might go back to it's regular price. Or if there's a shortage of beans the price might go higher. You just have to wait till the value goes up.

phlegmfatale said...

*little puffs of steam coming out my ears*
Bloody intangibles!

schnoobie said...

I knew thare wuz a reason I got my change in a Ball jar..in the backyard...buried under the chicken coop...hell I jes lucky to have that.... Your best investment??
Really Phlemmy !!S-H-O-E-S!!!!!!

Becky said...

That's quite a bit that you have in there! I got started late, so I'm trying to catch up. I can't add much more than what the others said, but the key is that these are for the long haul so they'll be back up long before we retire. I feel sorry for the folks that were just on the brink of cashing them out, though, for they now have to wait for the value to go back up.