Don't panic about your 401(k) losses. Here's why.
Stocks have a history of recovering before jobs do.
When big public companies slash payroll, no stock seems safe. The current bear market is already being used as an excuse in some corners to condemn 401(k)s and indulge in pension nostalgia.
But before anyone mistakes the current market slump for a reason to drive us back into pensions, consider that historically the stock market recovers and even rallies well before the job market bottoms out. So out-of-work Americans who have a 401(k), including myself, should take heart.
Our retirement funds probably aren't too far away from getting back to work. Stocks are down 40 percent from their last peak, putting us deep in the bear den. But since investors can execute trades much faster than corporations can start hiring en masse again after a recession, stock prices will likely rise before the economic recovery is official.
That means those of us who leave money in the market, or push our 401(k)s back into stocks while prices are low, could see returns again even as unemployment continues to increase. As an old Wall Street adage holds, if you panic, it pays to panic early. The time to flee the market is before things get really bad, not when they're at or near their worst.
This is something President Obama hopefully keeps in mind as he crafts his economic recovery plans around a desire to boost employment.
Today's unemployment rate is 7.2 percent. The last time unemployment reached this level or higher thankfully wasn't the Great Depression, but 1992, when unemployment was 7.5 percent. If we reach 9 percent unemployment by this year's end as some economists predict, that would get us on par with levels of the early 1980s. That's also the last time we saw continuing jobless claims as high as they are now.
As bad as those numbers are, we should all be glad if the 1980s is our closest guide. The two recessions we had early that decade lasted almost two years combined, as figured by the National Bureau of Economic Research.