A Rough Start For New Investors In 2008

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I received another reader e-mail whose question was very similar to this worried young investor’s question from back in November. Essentially they still wanted to know my opinion in this bleak market and if there is something they should do. I can’t blame them for asking. Although I was in the buy-and-hold camp, here’s the chart for the Vanguard 2050 Retirement Fund (VFIFX) from November 2007 until now:


In addition to my suggestions in that post, I also wanted to add that I can empathize with their situation. My very first Roth IRA was only partially funded with $1,000 because that’s all the money I could spare at the time. I then proceeded to buy shares of Janus Mercury, recommended by various publications and rated 5 out of 5 stars by Morningstar at the time. How could I lose? This was around 2001-2002. It tanked. Although I didn’t sell that year mainly because I didn’t know what else to buy, the next year I was certainly not interested in making any more IRA contributions!

Looking back, I would say starting out involves a good dose of luck. Let’s say 60% of new investors are up during their first year. For these lucky folks, they have a bit of “house money” to cushion any future losses. They have a positive vibe, and are more likely to keep their portfolios constant and make a habit of contributing regularly.

But what about the other theoretical 40% of new investors? They start losing money in their very first year. The media is now showing nonstop stories of foreclosures, rising inflation, weak dollars, poor job reports. Beginning investors are not used these drops. In their eyes, it took them months if not years to save up enough money in a nice, safe bank account before finally opening a Roth IRA. Then in a few months nearly $1,000 (20%) of it might have already disappeared! Worst case, they might be turned off from stocks for years. I’m no expert, so I can only reiterate the importance of time horizon when investing.

I’d like to hear how other people remember their very first year investing. Was it a good year for you? Bad? How did you react?

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  1. I was in the 40% too. I used to jump from fund to fund after looking at nothing more than 1-5-10 year averages. What an idiot I was. I now keep everything in either international or domestic index funds. I alter the ratio between the two from time to time. Do yourself a favor, pick an index fund and leave your money there. Its hard not to want to bail when things dip, and then perk up for a bit (like right now). That really isn’t great logic for people looking for growth.

  2. I always try to remind myself during the down periods that it is a great opportunity to buy. As long as you aren’t nearing retirement, the downturn in the market could result in many of us buying low.

  3. moneyandpf says

    I have mind in this index you mentioned above and in the first year to be honest I don’t remember how well it did other than it wasn’t horrible but not amazing. Really I just invest in these life cycle funds or other index funds and wait. I might look at them from time to time just to see how it is doing but I won’t buy or sell if it has an extreme moment.

    My investing strategy is simple. Invest as much as I can, sit back and let it grow (Over many years obviously), and don’t worry too much about what happens in between.

    Now as I get older I might be worried more if stocks are taking a beating but for right now in my 20’s I’m just going to let it ride out the storm and see the sunlight. What’s even better is that if something bad really did happen and I lost a lot of my investment I’m still young enough where it would not kill me.

  4. I too am a very young investor in my first year of investing – but I am not worried… in fact I’m happy the market keeps going down because I know I am buying more shares than I would be able to otherwise… which in the long run will be very beneficial to my portfolio.

  5. I was picking individual stocks and they were rising simply because it was the end of the 1990’s. Then the market started tanking and I got very short-term oriented. After that it’s been a smooth ride in the buy-hold investing camp. If you are thinking of selling now, please don’t. The best time to buy into stocks is during bear markets..

    If I were investing for the long term for retirement, I would be interested in building future income, as opposed to simply chasing performance. Research shows that on average dividends account for 40% of total returns over the past 80 years. If you buy stocks that pay you steady dividends, you will be ahead of the game during bear markets as you will keep receiving money for holding stocks. At the same time everyone else will be focusing on capital losses and selling at the wrong time.
    Oh yeah, and research also shows that stocks that pay above average dividend yields,( but not excessive ones) tend to outperform the market over large periods of time..

  6. I figured that I would get my Roth IRA contributions in before tax season started and get myself in the market for an additional three months… that was January 1st and the $4000 I put into VFORX (retirement 2040) is now worth $3600. In the grand scheme of things losing $400 really isn’t a big deal, but it is annoying to see it go down 10%. But, I am looking at it as a great buying opportunity because everything is on sale 🙂

  7. Grad Student says

    I opened my IRA in 2000 (I was 18) with $1500 and bought Oakmark Equity and Income. I think it was because my dad liked Oakmark Select and that was a less risky fund from Oakmark that had 5 stars. I wasn’t interested in trading a lot, so I didn’t do anything with it until 2006 (about when I started reading this blog). In hindsight, I guess it was a good choice for me not knowing anything about investing because I didn’t sell or lose that much in the 01-02 decline. By 06 it had grown to about $2500. Since then I sold it and now have the fund mentioned above – Vanguard 2050 and continue to put my measly $50/month in there. I guess if I had any advice for first timers, it might be to go a little cautious for a while so that if you do lose money in the first year, it doesn’t wipe you out. Maybe start with the 2025 instead of the 2050. Then switch to 2050 when you get more comfortable with riding out the down turns.

  8. I bought into almost that same fund (but the 2045) almost exactly a year ago. I’ve lost 250 on 4k. *Shrug*. If I wanted assured returns I’d buy CDs.

  9. My husband started working in a non-tech company, and contributing to a 401k, in 1999. Yes, nothing is quite like investing at the peak of the market. Even contributing to an S&P 500 index fund, and eschewing individual tech stocks, it still felt like we were throwing money out a window. But I guess we lost less money than some people… so we’re still plugging away with index funds.

  10. After graduating college, I started my first real job in January, 1985. I don’t know when my first year of investing would be, but my wife and I definitely had money invested in mutual funds on October 19, 1987, Black Monday.

    It was a bit scary at the time, but we knew our time horizon was long, so we didn’t panic. I have no doubt that 20 years later, the money we had in the market that day probably gains or loses as much, dollar-wise, as it did on Black Monday pretty much every day.

  11. Matt Good says

    I’m about 1.5 years in to my first “real” job, so I’ve had an interesting time watching my 401k balance grow nicely at first, and now plunge rather badly, below my actual cost basis. I’m not worried, because as long as I don’t lose my job because of the economy, all this buying low will help in the long run. There certainly is a lot of red when i look up my funds online, though…

    One way the economy IS affecting my investment decisions is in the area of a roth ira. I would really like to put money into a better international fund, but with the dollar being weak, it seems like I would be getting more company for my dollar if i invest domestically right now… Seems like it would be the equivalent of buying the dollar low, rather than buying a Euro high.

  12. ongrowthtrack says

    I started investing in individual stocks in 2003 with a discount broker. At that time I was investing every time I had cash to spare, I am happy with the results. Now I have another broker that pays money market rates on my cash, will invest in an index fund at the right time.

  13. This is my first year… and its not pretty. Luckily I had most in cash because I’m saving for a house, but for the part that is in stocks… I’m going to stubbornly “hold” and go to my happy place / stop signing in to my Ameritrade account for a while. 🙂 I logically know this is actually when I should be buying, but, again – that house savings seems more important at the moment. Oh yeah, and I’m a chicken. 😀

  14. I am a veteran investor (in the market since 1991), yes time is on your side. Over time, the stock market is your best investment. Since last summer, I have been writing covered calls and average about 4-6% each month, even in this down market. For new investors I would suggest the Vangaurd Index 500 VFINX and for some emerging market exposure either VWO or EEM (both ETF).


  15. With all this volatility right now it is all about timing. I will be curious how the stock market reacts next Tuesday after the Fed’s meeting. I do not believe we have seen the bottom yet…maybe after the election. Heck, we have not formally been in a ‘recession’ yet. I like ETF’s right now. Went onto Finance Yahoo! and found all the available ETF’s out there. They even have them categorized…I especially like the Bear Market group right now. I would recommend FXE & SH most definitely. Followed by SLV, GLD, GDX, DBA, DBB, DBC.

  16. As a young investor myself, I completely understand where your reader is coming from. Minimum investments in all mutual funds is a hefty sum for someone just starting out. Trent over at The Simple Dollar had a great article on how young (and old) investors should look at it:


    It’s rough to see our hard earned $$ disappear, but we need to “keep truckin”. Don’t sweat it, the market is down this year, but next year could be way up. In which case all the investments we make today will be worth a TON during that time!

  17. I started investing at the beginning of the last bull market, so I’ve done fairly well for myself. I pretty much just ignored it.

  18. Dan Isaacs says

    I think it’s fair to say that over time the Stock market has shown to be the good investment, in that it offers the highest returns. But none of us can say that it certainly will be, or that it always is, the best place for your money. It’s certainly the case that fortunes can be lost. It’s absolutely true that if you need to cash out in a down cycle, you may not be able to cash out much.

    Don’t get me wrong, I keep %80 of my retirement in mutual funds. And I HOPE it pays off in 30 years. But there is risk. And it behooves no investor to forget that.

  19. there is way too much of this buy and hold mentality. this concept is packaged and sold by the finance industry to get people to keep buying their products, even when you’ll be losing money

    there ARE time when it is bad to hold stocks. yes, it can be tough to tell, but if general economic conditions are bad, chances are good you will either be losing money, or not gaining anything, in which case just get into a money market fund (or even better, an international currency fund).

    and for those concerned about timing. hey, it doesn’t matter if you are a little late in the game. if the market is turning sour and there are big problems (like credit crunch), you sell. if you miss the first part of the eventual upturn, its not a big deal. that will tell you to look at the economy, and if you believe its good, you can buy afterwards.

    doing this will save you a lot of money and sometimes worry.

    this is not a radical idea. i’m a CFA, and yet I still base a lot of my decisions on reading one book from about 100 years ago. i think it reminiscences of a stock operator. markets may change and evolve, but in the end, they’re based on people, and human behavior doesn’t change all that much.

    this is not something only experts can do. the same time one might spend trying to get a good deal on a TV to save $200, can also be spent understanding current events, letting you save $1000s.

  20. Pooh pooh. I entered the market when I got my first bonus in my first job out of college. Guess when that was? June 2007. So tack on the crappy months before Jan 2008 to the losses since.

    I’m not worried. 🙂

  21. 7million7years says

    Depends whether you are a “glass is half-full or half-empty” type of person. Right now the market is LOW for a new investor … so, it could be a great time to buy into a low-cost Index Fund and wait … 30 years.

    There has been NO 30 year period (including buying INTO the market the day before the big stock market crash in 1929) that has not produced a positive return …

    Worst case for a new investor now, they are buying part-way into a downswing … this means the market is now on SALE!

  22. xreflux, buy and hold isn’t just a strategy that the financial industry sells. Many of them would benefit from frequent trading as long as you are still buying some form of financial product.

    Buy and hold statistically works. Most people are not good at getting out of the market when times are bad and recognizing when it’s a good time to get back in (btw, this is true for both professional and individual investors). Also, the buy and hold strategy does not say go buy just any garbage down the street and hope you can unload it on someone down the line for a pretty chunk of change. Buy and hold is more about finding companies that you believe in (or mutual funds if that is your thing) and sticking with them as long as your reasons for investing have not changed.

  23. The panicmongering going on today (see the WSJ prediction published today that we ARE in a recession) dissuades many people from wisely looking toward the future. The stock market does that; why shouldn’t we? Gold and oil are traded as FUTURES, meaning the price you hear is what trade speculators expect them to hit. A stock price shows what investors think $1 today with that company is worth in future value.

    In comes the necessity of a forward-thinking strategy. I’ve held investments off and on (used to buy a home and then restarted) for over 15 years, starting with $2000 I inherited in 1991. During that time, I learned (as a teenager) the importance of dollar cost averaging. In a diversified fund or an index, periodic regular small investments help cushion the fall of a market, because you will purchase shares irrespective of market trends in a regular and not reactionary fashion.

    When I cashed out my Berger Fund (now Janus) to buy a home in 2003, it had regained its 1999 level and given me an overall 115% ROI from 1991-2003, and I had weathered the storm unscathed during the 2001-2002 recession. My inlaws by contrast panicked and pulled their money out, only to reinvest when the market climbed back up at a net loss.

    For example: the last two months, my major investment USCGX oscillated between 7.97 and 8.43 per share. My shares were scheduled for purchase on the 12th of each month. In January, I bought at 8.03; February at 8.10; March at 8.06. Between the February and March purchases, the value of the fund surged to its highest point this year, but my purchases have all been near the lows of the year. If the market goes up, I win. If it goes down, I lose less than if I’d bought at the peak.

    I believe the stock market is much like the ocean. Each wave is followed by a trough, but overall, the sea remains steadily increasing in volume thanks in part to glacial melt in the Antarctic. Sometimes you see tidal waves, and if you’re lucky enough to catch a wave and sell at the crest, kudos. If not, remember that the sea carried wave after wave of ships safely to destinations without too much trouble.

    I am not worried about that. I am more worried about increases in capital gains taxes proposed by the House, which will cost me more than the current recession will.

  24. xreflux –
    With respect, you should not be telling people to sell when the market turns sour and buy when the market is looking better. That’s ridiculous. It’s surprising that a CFA would suggest that. Essentially what you are saying is “Sell low, buy high”. You can dispute that, but I’m a fairly knowledgeable investor and that is what your comment says to me. What do you think it says to the average investor?

  25. I started investing in 2002, what a bad idea! I instantly lost 20% and completely lost my faith in the USA. Started investing in international funds right after that recouped my losses and made lots of $$$. I panicked last summer sold off all my holdings at a huge tax expense. Glad I did, because I again sold off all my dollars by buying hard assets and foreign currency, I’m up 25% this year. I have no faith in stocks and honestly I think buy and hold is a full of crap, a way for people to collect more fees in down down down markets. Gotta love wall street.

  26. i’m with grad student, i invested in fidelity’s 2025 fund, as it is more bonds, less stocks, as i knew we were heading toward a bear market, and i didnt want like 90% stock exposure. well i’m still down about 8%, and i am waiting until mid april to contribute to this year’s roths. the dow is heading for 10k, no need to be exposed to that any longer than i need to.

  27. “if you miss the first part of the eventual upturn, its not a big deal. ”

    Wow. So they teach market timing for CFA’s now. Must be after the selling annuities class.


  28. I had my portfolio looked over recently and they told me everything was good — it was well balanced, with a good mix of stocks, bonds, real estate, etc.., and I kind of thought so too. Problem is really that there was a bad 2 years about 7 years ago where my “well-rounded” portfolio was kicked so hard that it never really recovered looking at the 10 year time horizon. Every year for the past 5 or so have been relatively good, taken together it doesn’t look so good. And now, this year will be another one of those. But of one thing I am sure — if I pull my money out of stocks right now, they will all surely go up and vice-versa. Story of my investing life.

  29. What an opportune post!

    I’m 20 and looking to invest for the very first time in the 2050 fund also.

    However, I want to do a lump-sum investment for 2007 (before April 15th) but, as you mentioned, this market downturn is worrying me. I know I should just do it but should I not go with a fund so heavily based on stocks? (And maybe scale back with a 2025 fund like some readers have mentioned?)

    At this point, my gut feeling is still to go ahead and lump sum the $4000 in the 2050 fund and just take the “buy and hold” perspective. Eventually it’ll go up again right? :/

  30. The great Myth is that over the long term the stock market and housing always go up. This is based only on 80 years empirical evidence at most and only 30 years since we are off the gold standard – which basically means all bets are off.

    If you invested in 1928 it took 25 years for you to regain your losses. Right now we are equal to what the stock market was 8 years ago – unless you invested in the Nasqaq index then you are less then half way back to the peak (and dropping). All of this is ignoring inflation also. It’s also ignoring that the 30 stocks in the Dow today are not the same 30 stocks that made up the index even 10 years ago – what is going up is whatever they decide to put in the index (thats doing well:)

    The real answer is we have never faced a financial market like what we are seeing today and no one can say what the long term will look like by looking at the past. If you make 8% on your money this year will you get more or less gallons of gas for what you have at the end of the year – most likely less. All that anyone can ask of you is be prudent now and hope the big guys will not make too many mistakes.


  31. Eric, it’s great that you are 20 and already looking to invest. No one can predict with any certainty where the market is going to go in the near-term. Some people try but usually lose money in the long run.

    Look at it this way, you’ve got a great opportunity to buy into the market more cheaply than you could have 6 months ago. No one knows where it’s going to go in the near term but unless there’s a nuclear holocaust or something similarly devastating history says the market will go up in the long term. And if there is some catastrophic event like nuclear war I’m willing to bet you don’t really care how much money your brokerage says you have 😉

    Good luck, I think that you have a bright future ahead of you if you are already thinking about things like investing.

  32. My first fore into the investment world was through my parents. My grandparents passed away when I was 16 leaving me a large sum of money. It was placed in a custodial account and my parents invested 100% of it in the Mundernet net fund (~1998). When I finally withdrew the money 8 years later I had 7% of the money I parents put in. If that money was managed correctly I could have retired on it after 40 years without any additional contributions. After the initial shock wore off I took this as an opportunity to really learn about investing and become financially savvy. In the long run I think the experience worth the loss because I will be much more responsible and educated.

  33. One of the best things I realize in hindsight is that I started investing in 1998 when I first got out of college. You learn so much living through a bubble and it’s subsequent collapse. I was lucky I didn’t have that much money at that time to get wiped out, but wiped out I did. my 401k went from 20k to 5k. My shares of lucent I purchased though the employee stock plan went from $75 to about $2. But I lived to tell about it and am a much better disciplined investor because of that experience. Far from perfect but better.

  34. I liquidated everything b/c i needed the money to keep my traveling going….

    BUt I agree with casey. I don’t like going on past performence and I think the changing economy of the world, the increased role of third world countries, resource scarcity, and the decline of the us totally change the market equation. I think future returns wont be as good as past ones when looking at the total market.

    I think you are going to need to be much more targeted. Targeted to sector, and geography.

    Personally, I think this is a great time to buy- I’d buy asia or india funds, brazil funds, energy, and water as well as the big global companies cause they transcend borders.

  35. Nassim Teleb(sp?) talks about generalizing from the past to the future using the example of a turkey that predicts what will happen tomorrow by using what happened yesterday. Every day is pretty much the same until that one day in November.

    Generalizing from the past performance of the housing or stock market amounts to much the same thing these days. We are in a very unique era, I think. I might not be so inclined to the hold-it-and-forget-about-it mentality.

  36. Cayden,

    Thank you for the kind words and advice. I do feel blessed to realize the importance of investing, particularly for retirement, at this age. Although this realization doesn’t make it any easier to navigate the investing realm, I seem to have read and learned enough to at least know that nothing will happen if you don’t at least try.

    I just hope my first try is a good one and not something I’ll regret years from now!

  37. I fully funded my 2006 Roth in March 2007. And fully funded my 2007 Roth and am track to do the same for 2008. It’s all down way more than the money I put into it.

    I do not check my balances often. Also, I also think about a market downturn as the funds being on ‘sale’ with a long term horizon. I’m buying many more shares for the same price as I did a year ago.

  38. I contributed $5k to my Traditional IRA account for 2008. But, now I want to open a ROTH IRA account and move that $5k to it. Will Vanguard be able to do that?

    If yes, do I need to file Form 8606?

    BTW, I’m not worrying about my retirement fund a bit because i’m in this for 40 years. I believe the market will turnaround.

  39. Matt Henderson says

    There’s a quote from William Bernstein that I love, “If you’re a young investor in the accumulation phase of your life, pray for market crashes.”

  40. This past year was my first year of investing, and I was most definitely in the 40% group. I put 4000 into a Roth IRA before starting law school, and it’s lost about 15% of it’s value. I don’t have anything else to add to retirement this year, nor will I likely have anything more till I am out of school, but I don’t think this current market downturn is a turnoff, if anything I wish I had more to invest now while the market is down. This is a long term thing, and you will inevitably have a few years where you feel burned.

  41. Bear Sterns was trading at $150 less then six months ago – tonight JP Morgan bought it for $2/share – it’s never coming back and it was a huge financial company that was founded in the 1920’s. Someone brought up Lucent that peaked around $80-$90/share and it went all the way down to $1.75/share and is never coming back (along with every company in the sector). The Nikkie index was up to 40,000 in 1990 and is now going down at under 12,000 18 years later and isn’t even going in the right direction. Oil was only $25/barrel in late 2003 and never was much over that much even in the 70’s oil crisis and now is at $110/barrel and maybe never to go under 90 again. China is doing great now – but maybe a little too great if you are worried about possible bubbles.

    All of the above examples are of major companies and countries not fly by night enterprises. It’s hard for me to go along with the buy and hold thoughts. There are systematic issues in the worlds financial markets today that we have literally never faced before. The whole world is between a rock and a hard place where the solution to one problem makes the other majors problems worse. Right now the choice is to flood the world with money and lower interest rates and the direct effect is a huge increase in commodity prices of all kinds that directly affects everyone on earth daily (Gas, Milk, Corn, Wheat, etc) all the while while the US $ plummets which the effects of haven’t even really been felt yet but are starting to big time in companies bottom lines around the world.

    We started this crisis with business financial’s actually in decent shape. Once that starts to go with the rest of the problems there is no where to go but down. Maybe one day we will recover but it won’t bein the next couple of years that you will be saying that you missed the boat by not jumping aboard at these “bargain basement” prices.

    BUT – all will be well – much better then people think – but thats a story for another day (not too far off).


  42. According to statistics, average annual stocks returns is plus 11% in its history.
    In this history, there were two big wars , several economic turmoil and black monday etc.
    If we put money into stock market when market price is tumbled, we will be able to get more better performance.

    Personally I think we should be long term investors.
    In this year, I brushed aside fear, then I bought indian mutual fund and some asian stocks.I am going to hold them for 20 years as my retirement plan.

  43. I agree with dong (I’m even a fellow telecommer, working for his main North American rival!), going through the bubble makes you learn more. I started in ’96 so I had a bigger buffer (and bigger fall). Fortunately for me by the time of the crunch I was already uncomfortable with my large holdings in tech and started buying other sectors (and subsequently using the crunch to buy other sectors on the cheap). Before this current downturn my diversified holdings were doing way better than tech so I got firsthand experience that diversification pays off! I wonder what I will learn from this current downturn.

  44. I’m fairly young (24) and I started investing a few years ago when I was about 20 years. I remember opening up my first account and I would put a few hundred dollars into a mutual fund each month. The first year I had it, it did awesome, I had a nice 12% return and the following year was just as good. Onto this year, it makes me glad I didn’t start investing for the first time becasue I could see how it could turn people off, haha.

  45. I sat back when I was in college and grad school, leaving my money in a bank account. I focused on my training since I expected my earnings to multiply. Eventually, though, it seemed ridiculous, so I moved ~$100,000 into an index fund (over a couple months), and promptly lost 15% (approximately). When your income is $30,000 and you are eating ramen to save money, this really hurts. 🙁

    Casey wrote, “The great Myth is that over the long term the stock market and housing always go up. This is based only on 80 years empirical evidence at most and only 30 years since we are off the gold standard – which basically means all bets are off.

    If you invested in 1928 it took 25 years for you to regain your losses. Right now we are equal to what the stock market was 8 years ago – unless you invested in the Nasqaq index then you are less then half way back to the peak (and dropping). All of this is ignoring inflation also….

    The real answer is we have never faced a financial market like what we are seeing today and no one can say what the long term will look like by looking at the past. If you make 8% on your money this year will you get more or less gallons of gas for what you have at the end of the year – most likely less. All that anyone can ask of you is be prudent now and hope the big guys will not make too many mistakes.”

    This is precisely right. I think nowadays also the Wall Street firms are skimming off a large fraction of the profits to be made from investment. They are able to make highly leveraged bets that the rest of us can’t, with no downside because the government will always rescue them. These companies making 30% a year because they are so leveraged are taking profits from the rest of us. There is no good reason to believe that stocks will always go up, much less at 10% a year. Look at other countries and their records have often been quite bad (e.g., waiting thirty years after a crash simply to break even).

    “It’s also ignoring that the 30 stocks in the Dow today are not the same 30 stocks that made up the index even 10 years ago – what is going up is whatever they decide to put in the index (thats doing well:)”

    This isn’t right. You can’t track the Dow anyway (so it doesn’t matter). But the S&P500, which you can buy an index for, has nonetheless tracked the Dow pretty well, historically.

  46. As a young investor, I’m thrilled that some of the air is being let out of the market and the valuations are getting more sane… I just wish I had more money to put in each month.

  47. I just wrote about this on my blog, I am at negative 11% on my Roth IRA and negative 10% on my 401k. Both are pretty aggressive funds, so I am not too disappointed.

    On a side note, I took the opportunity to buy some Google shares since they seem to be “on sale”, 37% down YTD and 1.6% down on a 1-year period.

  48. xreflux – what book?

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