401(k) Investors Achilles Heel #4 – Managing Risk Through Contributions
Since the beginning of May, let alone since the final quarter of 2007, the market has been volatile, to say the least. One of the biggest issues we see during this time is people will stop their contributions when the market takes a down turn, and then contribute again once the market is doing “better.” Unfortunately, as with the other achilles heels we have discussed, this is the exact opposite thing 401(k) investors should do.
It’s perfectly understandable why people do this, asking themselves, “why invest in something that is ‘losing’ money?” When the market is going down, you might have heard people say it’s on sale. However, it can feel hopeless as your contributions may look like they are evaporating as soon as you toss them into your 401(k). The most important thing to remember is you are buying an asset when you contribute to your account. They are called shares of the investment funds you have access to in your plan.
Shares are owned by you. If the market goes down, your contributions should be purchasing more shares for the same amount of money you always contribute. The more shares you own, the better, so investing during a down cycle in the market is a very good thing.
If the market decreases by 20% like the real estate market has in the past few years, you do NOT lose your shares. Instead, they simply decrease in value. For example, just because the value of your home has decreased by potentially 20% in the past few years, that doesn’t mean your garage will be gone when you get home. The physical asset is still there, it is simply devalued.
The following slides are from our Myths and Tips for Investing in Volatile Markets presentation. Make sure you take a look at the final slide illustrating the exponential growth in your account from investing through the down market. The shares you purchased at the ‘bottom’ are the ones that appreciate the most. In this case, the pain of the downturn can pay off in a big way for you once the market rebounds.
Myth i shouldn’t invest in this market, i keep losing money.
Chad:
I agree 1000% that “one of the few benefits of a bear market is the ability to buy low.” I’m often perplexed when I hear young people tell me one of their goals with their 401k is to not lose money.
For those 401k investors that will be net buyers over the next decade or longer, this is a pretty sweet opportunity we are living through.