With a recession (depending on whom you ask) upon us, would it have been wise for us to have taken a loan from our 401(k)s before it started? Bear with me here for a second. A loan from your 401(k) is pretty simple. You borrow the money from yourself and then repay it to the 401(k) with interest. The interest is usually something low. Normally, it’s a bad idea, as the market usually performs as well, if not better, than the interest on the loan.
But, if (and that’s a big if) you were able to time the market relatively well to know there was going to be a downturn, you could loan the money to yourself. Because the money would not be in the account, it wouldn’t suffer from the loss of value in your investments. And instead, you’d gain whatever the interest rate was that you loaned the money for. Instead of a double digit loss, you could have a relatively decent gain. In theory it could work.
In theory. The catch here is that you would have to time the market correctly. If you missed it by a day, you could cost yourself some money. If you were totally wrong and the market rallied, you’d end up missing out on possible gains. But, if it worked, it could work out pretty well. In the end, the more I look at it, it’s really a form of gambling. You’re gambling that you can time the market and save your money.
Gambling is never a safe bet when it comes to your retirement. It’s always tempting though. It’s important to remember that a fall like we had over the last few years almost always comes back up. You haven’t really lost money so much as lost value. There’s a big difference there. And if you keep contributing, which you should, you’re buying the very same investments at a bargain price. So, instead of trying to minimize your losses by pulling your money out, you should be increasing your investment to maximize your return when the account finally bounces back up.
Shane Ede is a business teacher and personal finance blogger. He holds dual Bachelors degrees in education and computer sciences, as well as a Masters Degree in educational technology. Shane is passionate about personal finance, literacy and helping others master their money. When he isn’t enjoying live music, Shane likes spending time with family, barbeque and meteorology.
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