Dear Jan Connell,
I am deeply concerned. My husband and I contribute to our 401(k) plans at our places of employment. During the past year, we each lost more than one third of the value of our mutual funds in our 401(k) plans. What exactly are stocks, bonds, money market funds and mutual funds that we invest in for our 401 (k) plans? How safe are these securities? I find myself worrying much of the time. We have two children under ten, a house mortgage, two expensive cars with outstanding loans and some credit card debt. Our goal is to raise our children well, get out of debt as soon as possible and build a retirement portfolio that allows us to have some good years together without money worries. We want to begin saving for our children's education. If we lose our jobs, what happens to our 401(k) plan savings? What can we do to get some peace and security in our lives?
— Concerned Spouse, Parent and Employee
Dear Concerned Spouse, Parent and Employee,
It is wise and admirable to ask such important questions about your 401(k) plans, your family financial situation and your retirement. As you have already intuited, there are no guarantees about any investments, jobs or tomorrows. Here are some guidelines for you to consider.
Simply stated, Stocks (equities) are ownership rights in a corporation. The Board of Directors of each corporation decides how many shares of stock to issue for sale. What is actually happening is that the Board of Directors is dividing up ownership of the corporation into as many parts as each share of stock issued. Such ownership is evidenced by stock certificates. There are two kinds of stock that can be issued for sale to investors who desire to own shares of the corporation: preferred stock and common stock.
Holders of preferred stock certificates are entitled to receive yearly dividends. The Board of Directors of the Corporation determines the amount of the dividend. Each preferred stock holder is paid a sum of money at a fixed annual rate, out of the net earnings or profits of the corporation, before any distribution of corporate earnings is made to holders of common stock. Cumulative preferred stock requires the Board of Directors to pay out the fixed annual dividend yearly, or if earnings are not sufficient to do so in any given year, they must accumulate funds to meet that payment to each cumulative preferred shareholder before any dividends are paid to common shareholders. Non cumulative preferred stockholders, to the contrary, must be paid dividends earned in that specific year. Should earnings not be sufficient to meet the obligation, the requirement is extinguished. Many corporations do not issue preferred stock. In that case, all the shares of stock are common stock.
Bonds are loans to government bodies, or to corporations. These debt instruments are evidenced by a legal document, often a certificate stating on its face the issuer's obligation to pay the bondholder a specific amount of interest for a specified period of time, and to repay the loan (the amount of the bond) on a stated expiration date. A bondholder is a creditor of the issuer, whether it is a government body or a corporation. Bondholders are never part owners as are shareholders.
A Mutual Fund is an investment company that raises money by selling its own stock to the public and investing the proceeds in other securities. The value of the stock of the mutual fund fluctuates according to the market value of the securities in its portfolio. There are two different types of mutual funds. The capitalization (invested money) of an “open-end” mutual fund is not fixed and more shares may be sold at any time. A “closed-end” mutual fund, on the contrary, has fixed capitalization and only the number of shares originally authorized by the mutual fund directors may be sold.
A load mutual fund is an open-end investment trust in which a fee is charged to a buyer who purchases shares. A no-load mutual fund has no charge for buying its shares. However, experienced mutual fund investors realize there are administrative costs for both load and no-load mutual funds and there are usually costs associated with the sale of mutual fund shares.
Money Market Funds are deposited in the money market. This financial instrument provides an opportunity for people to invest in short term paper such as notes and loans in contrast to the capital market that furnishes long term financing. It is conservatively estimated that at this time, in excess of a trillion dollars is invested in money market funds in the United States alone. Funds deposited in the money market earn interest. Since each money market fund offers varying rates of interest, prudence requires the depositor to be aware of and comfortable with the terms and conditions of the money market fund he or she chooses.
Personal Happiness and Sanctity
Immense creativity on your part is possible as you work and save for retirement, guide your children's education, repay your debt. Hidden in that creativity is the opportunity for much personal happiness and great sanctity. God desires only the best for you and your family. Decisions you and your husband make affect your family lifestyle and ultimately what kind of citizens and saints you and your children will become. You are not alone. God is your partner if you so choose.
• Funds in your 401(k) plans belong to you, not your employers. You can include savings and prudent investments to supplement your retirement. Your spending habits and family choices all too often determine whether your personal lives are financially arduous or pleasant. Pray for wisdom and protection as you choose how you spend your money.
• Do you have a trusted financial advisor who demonstrates competency, integrity and spiritual values that are consonant with yours? Your life situation could be vastly simplified, enriched and blessed if you would find such a person to help you understand, plan and fulfill your financial goals. Pray for that grace and seek such a financial advisor.
• Who are the beneficiaries of your 401 (k)plan? Do you have a valid will or living trust that provides for your spouse and children? If you do not have an attorney who understands your family spiritual, financial and personal goals, call your local bar association and ask for names of three attorneys who specialize in estate and trust areas of the law. Interview these attorneys, and continue to seek referrals until you find someone with whom you feel comfortable to accomplish your most personal desires for yourself, your spouse and particularly your children's care, education and well-being. Your commitment to your family does not end with your death.
• Shakespeare wrote that more things are wrought by prayer than this world dreams of. In prayer, develop family financial goals together for which each of you is willing to sacrifice to achieve. Consult with and allow your financial advisor to guide your financial decisions about your 401(k) investment choices, your debt repayment, education goals and savings. If you pray, work and sacrifice together as a family to achieve committed goals, you will have the blessings of peace and contentment to enrich your shared lives.
• Do not worry. Worry is, after all, lack of trust in God and flows from absence of follow-through in your personal and financial goals. Remain in contact with your financial advisor. Stay the course by focusing constantly on your commitments. Teach your children to be responsible for all their actions. Your example will ennoble your family and everyone you influence. If you are satisfied with your financial advisor, and each of you in the family is doing your part, your family will have peace in up markets and down markets alike.
Blessings,
Jan
P.S. For more of my columns click here.
(If you have a question for Jan, please email her at JaniceTConnell@compuserve.com. Please be aware that not all questions can be answered online.)
Considered a leading authority on Marian Spirituality, Jan Connell is the author of Queen of the Cosmos, The Visions of the Children, Triumph of the Immaculate Heart,Angel Power, Meetings with Mary, Praying with Mary, Prayer Power, and Queen of Angels.
