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Saturday, November 28, 2009

Giving Thanks - Legacy 401K now Back to "401K" + Lessons Learned + Dubai

We wrote in early June: "While the sustainability of the recent market recovery remains a question, it's worth noting that the "201K" so lamented in mainstream media is now almost back to a "301K" (S&P500 down only 31% from the index's 52 week high of 1367 versus down 51% at the low). Things can change quickly. At some point, we believe the "301K" will once again be a "401K"."

Well, good news: the recovery was faster than we thought. Last week, we were pleasantly surprised to learn that our legacy 401K account (from a former employer) is now back to what we originally put into the account. Boom - just like that.

We again think of a 60 Minutes episode from 4/19/09 (link here) that focused on the "201K" situation and widely held views that retirement savings and plans for retirement were forever destroyed. Although we're not sure how our 401K recovery performance compares to the national average, we're fairly certain most funds are well above their lows. And, assuming persons didn't run for the hills and kept their monthly allocations unchanged during the massive plunge, they benefited from an amazing dollar cost averaging opportunity through the period. We didn't have this advantage as our legacy account was no longer active during the crisis, but we still made out pretty well.

Two lessons from ring especially true from the past year :
  • Dollar cost averaging is smart since Market timing is near impossible on a consistent basis
  • "The time of maximum pessimism is the best time to buy." (Sir John Templeton)
  • Put another way: "Be fearful when others are greedy, and be greedy when others are fearful." (Warren Buffett)
Per our recent posts, we argue that we're now past the most fearful points as psychology is now in a better place and many Americans no doubt feel better about their retirement savings than only six months ago. Of course, no question that many economic indicators remain troubling and high unemployment with reduced consumption may continue over the medium term. Plenty of fun topics to discuss over Thanksgiving dinner (the other day).

We're not saying the road ahead will be smooth and we may see curve balls such as the Dubai debt problems. On the Dubai topic, we never did believe in the "field of dreams" idea, i.e. "build it and they will come". Last we checked, "spec" real estate projects carry a high degree of risk even in good times (acknowledging that most of Dubai's projects were started pre-crisis, not considering seemingly aggressive global investments such as port properties). Clearly, the overhang of easy money excess is far reaching and will take time to resolve. We think we'll muddle through current issues.

For those interested, our 401K fund is invested in two equity funds: the Dodge and Cox Stock Fund and Artisan Small Cap Value Fund. We know that some onlookers might think we're crazy for concentrating in only two funds, yet we're comfortable with the allocation since the funds' investment approach is time proven, essentially: buy good companies cheap and remain patient as they grow and/or until the manic Market comes to award fair value to the businesses.

The same onlookers would say we're doubly crazy because we subscribe to the same approach with our own capital. Why? Very simple: it works.... However, any agita experienced by the onlookers might be reduced somewhat by our REIT allocation and positions in certain closed-end funds that provide both current income and potential for capital appreciation.

Happy Thanksgiving and Happy investing,

Jeffrey Walkenhorst

Disclosure: long ARTVX, DODGX.

© 2009 Jeffrey Walkenhorst
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