Stock Market Crash Under Obama and Your 401k Plan

My husband is an economist and talks to me all the time about the state of the economy. So quite naturally, my sisters and friends call me and ask, "What do I do about my 401k plan with the way the stock market is behaving?" I am not a financial advisor or CPA, so I cannot make recommendations but I can explain what I know about the stock market and whether I agree about President Obama's role in the stock market crash and your losses.

An Example Candy Bar Stock Market

When you buy a stock, you are doing a bit more than buying a candy bar. We know that candy companies boost their production before holidays like Valentine's Day or Easter in order to meet predicted demand because we see all the goodies lining the shelves. But as a consumer, we go to the store wanting a candy bar. Which do we buy and how do we know we are getting good value? An average candy bar costs about $1. After holidays, left-over candy bars can often cost $0.10. If you are offered a candy bar for $3, you should really want to know whether or not you're getting additional worth for your money. This is a rough approximation of what goes on in the stock market, with the added difference that when you are buying a stock, you're not buying the candy bar, you're buying the candy making company.

My example candy company has hard assets in the form of factory equipment, land, contracts for candy orders, trained personnel, delivery equipment, etc. The book value of a company is a measure of the value of their hard assets. When you look at a stock price and it is 3 times book value, like in the case with the candy bar you should really consider whether you are getting your money's worth.

Did I Lose Money on My Stocks?

The amount of money lost in the stock market crash should be measured from your purchase price of the stock. If you buy a stock at $2 and it goes up to $25 and down to $8 and still retain your stock and still are paid a dividend, you have a paper loss of $13 and a paper gain of $8. If you sell the stock, you will have an actual gain of $8.

Caution 1: your original investment in a 401k may have been $2 but the plan manager may have bought additional shares with dividend payments and the book value of the company's purchased may have increased.

The Effect of the Stock Market Crash

The stock market crash lowered the prices of many stocks to book value or below. Have these companies gone broke? Have these companies lost any of their assets? Can these companies continue to deliver to their contracts? Can they continue to make money? The truth is many of the stocks that lost value are good companies with a proven history of management and good products. The overall economy is quite a bit more complicated than that but in general if you look closely at many companies you will find America still is in business.

What Happens with a 401k Plan?

When you put money into a 401k, you are asking an experienced money manager to buy a set of stocks for you according to the stated investment strategy instead of buying the stocks yourself. In the case of Boeing where I used to work, when someone put money in their 401k plan they matched the initial $1 of investment with an additional $0.50. That meant that people who invested in that 401k plan made 50% profit on their money, something that is hard to beat anytime.

Caution 2: Withdrawing money from a 401k may mean you lose company contributions and it may involve a penalty if you don't roll it over into an IRA.

Caution 3: Examine the stocks your 401k says they own, check their profitability, sales, debt and book value.

Some 401k plans aren't so generous, but they do offer protection from taxation. The bad part of 401k plans is that they hide the details of buying and selling stocks from investors and only deliver a summarized view of all the activity.

Depending on your statements and your investment strategy, you can decide whether or not you trust the 401k plan management to protect your money. Chances are you asked (not President Obama) the plan money managers to buy real assets priced like that $3 candy bar that will regain their value in the long term.