When it comes to building 401(k) balances, there are few secrets: Keep your costs low, diversify and get your employer's match -- if they offer one.
But here's one more tried-and-true way to boost your 401(k) balance: Consistent contributions through all markets. This has to be the least-sexy silver-bullet strategy ever, yet it works.
According to a recent study by EBRI and the ICI, the consistent contribution strategy not only works well over time, it doesn't require any decision making on your part. Here's what Marlene Satter of Benefitspro.com found when she reviewed the findings:
* "Workers who kept socking it away in good times and bad — including during the recent financial meltdown — saw their average balances grow at a compound rate of 6.8 percent annually during the five years of the crisis, year-end 2007 to year-end 2012. And that’s despite a stomach-churning drop of 34.7 percent in that group’s average 401(k) account balance in 2008.
* Consistent contributors’ median balance saw a compound average annual growth rate of 11.9 percent over the same period, reaching $49,814 at year-end 2012. That’s almost three times as much as the median balance across all participants at 2012’s end.
* Consistent contributors increased their holdings of target-date funds, with more of them having such funds in their accounts at year-end 2012 than at year-end 2007, and that they tended to concentrate their holdings in equity securities. Younger participants had higher concentrations in equity securities than older ones. "
How to Load Your Silver Bullet and Keep Firing
To do the 401(k) silver bullet strategy right, you need to ignore nearly everything you hear on cable news or read in business pages. If the market goes down, you contribute. If it goes up, you do the same. It's an even-keel strategy that works over time because you're doing dollar-cost averaging. You buy more mutual fund shares when they are cheap and keep buying.
Of course, none of this strategy squares with what investors typically do. They usually sell when the market drops and buy when it's going up. That's the opposite of what you should be doing. Market-timing is a loser's game.
How can you be a consistent saver when your gut is telling your otherwise? There are a few simple solutions:
1) If your employer offers an automatic contribution plan, sign up and stay in it. Your contributions will be made automatically. You don't have to think about them. This auto-pilot plan does consistent saving for you.
2) If you have an option in an automatic savings plan to increase your contributions as you get a raise, that's even better.
3) Consider target-date funds that are automatically allocating to specific stock, bond and other funds based on your age. While they are not perfect -- you have to see if their allocations make sense for you -- they are good "hands-off" vehicles that will keep investing through all markets.
