How to Manage Your 401(k) Through Market Down Swings

The stock market has been a lot like riding a rollercoaster the past few weeks – one day way up and the next way down.  It’s been mostly a fast ride down of late and many 401(k) investors have become fearful to the point where they consider pulling out of stock funds (the folks on the coaster screaming “Stop this ride!).  These folks are likely missing the best part of the ride though – especially if they have a decade or more to gain the advantages of market recoveries. 

The momentary relief that comes from cutting losses can be fleeting and quickly feel like an opportunity lost when the markets do improve. Ideally, we want to buy low and sell high. A down market in which you have a ten, twenty, or thirty year time horizon before retirement can be a great buying opportunity and put you in position to sell at a high later on.  Let’s take a closer look out how this works.

Buying More Shares in Downtimes Can Lead to More Rewards in Good

Regular investing turns out to be a great thing with 401(k) plans.  Each pay period most of us contribute a specific percentage of our paycheck into our plan. When the markets are down, your money is buying a greater quantity of shares. When the markets are up, your money purchases fewer shares. This is called dollar cost averaging. Because you get more shares when markets are down, you tend to be better off down the road. Consider this simple example of how this strategy can work for you:

By sticking with your investing plan in this scenario, you are 8.35% better off even though the market has not come close to exceeding the previous market high.  There are no guarantees with dollar cost averaging or the markets, but you can see how regular investing with the asset allocation that’s right for you (the amount you  invest in stocks, bonds, and cash) can set you up to be in a much better position over the long run.

 Recent Data Supports a Steady Approach

We all remember the big recession in late 2008 and 2009 that took a big bite at the time from our retirement savings.  According to data compiled by the Employee Benefits Research Institute (EBRI) for The Associated Press, 64 percent of middle-aged long-term workers had more money in their accounts as of August 8th than at the height of the market in 2007 (pre-recession).  At the beginning of July before the recent declines, at least 80 percent of that group had more money than they did in 2007.

It’s why regular investing combined with a diversified portfolio of stocks, bonds and cash are essential for your retirement accounts.  It’s a very good thing that most 401(k) plans are built on diversified portfolios.  While the S&P 500 (a good benchmark or the US stock market) declined by 15% from June 30^th to August 7^th, 401(k) accounts measured by EBRI were not down nearly as much, ranging from 6.6% and 9.5% lower. 

Stay the course as best you can and as global and economic environments change for the better over time, you will be in position to reap those rewards.