It is never fun to watch your nest egg decrease in value. Investments are supposed to grow exponentially over time; that is why you are investing rather than stashing money under your mattress — right?
So what should you do when your 401(k) starts to head south? Do you let the emotions take over, or do you make calculated decisions? Do you change your investment or stay put?
The truth is that your 401(k) is your best friend even in a down economy. When the market is doing poorly, you’re buying shares at a much lower cost – something investment professionals call ‘dollar cost averaging.’ You’re lowering your overall cost basis and buying stocks when they’re at their low point.
Besides the fact that you’re buying stocks at a bargain price, there are other reasons why you shouldn’t abandon your 401(k) during a tough economy.
Reasons why you can’t afford not to fund your 401(k).
1. Pre-tax 401(k) contributions are tax-exempt, both at the state and federal level. Additionally, earnings in your 401(k) can be tax-deferred until withdrawal at retirement.
2. By setting up an automatic contribution, you will never see the money in your paycheck. This eliminates the money from every passing through your “hands;” and, you’ll never miss it.
3. Many employers match your contributions. Experts call that “free money!” Make sure you are enrolled in that program. There are always a few employees out there who somehow missed that feature.
Some other principles to keep in mind as you work towards creating a healthy 401(k) when the economy is down:
• Start ASAP. The sooner you start investing, the better. If you are just starting out in your career as a young person in his/her twenties, start right away—even in a weak economy. Remember, a weak economy is the best time to buy those shares of stock within your 401(k)!
• Bargains! As a consumer, do you avoid sale and bargain items at your local grocery stores or favorite clothing stores? Of course not! Then why would you approach the market any differently? When the market is low, everything is “on sale.” It’s a great time to be consistently contributing to your long-term investment; eventually, the market will turn back around and your “on sale” items will grow way beyond their original purchase value.
• Don’t stop. Too many people consider suspending their contributions when the market performs poorly. However, if you do so, you might be:
1. Forfeiting free money (from a company match)
2. Forfeiting the “consistency strategy” which is a proven key to success in long-term investing.
3. Running the risk of forgetting to restart your 401(k) monthly investments! How many times have you told yourself to do something, only to watch months go by without acting on it…
Be Honest…You’re Trying to Time the Market
Trying to avoid the down market in an attempt to protect your nest egg is often a losing strategy. The average investor seldom succeeds in timing the stock market and simply trying it can really hurt your future earnings potential if you miss your mark!
So, if you are investing with long-term intentions, the 401(k) is still a great place to put your money. Hang in there, and you’ll be glad you did over time.
How do you respond when the market dips and your 401(k) loses value?
Tim is a personal finance writer at Faith and Finance a Christian financial help blog that provides financial insights for individuals, businesses, and churches. Outside of finance, Tim enjoys spending time with his wife, playing the saxophone, reading economics books, and a good game of RISK or Catan. Find him on Twitter and Facebook and subscribe to the Faith and Finance RSS feed.