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:
See the example via How to Manage Your 401(k) Through Market Down Swings – Forbes.