“Given the uncertainty in the stock market, should I stop contributing to my 401K?”
It’s a question we hear all too often as nervous investors follow the news of the stock market’s ‘wild ride’. Many clients think about stepping off the wild ride, thinking they can sit out the market’s fluctuations to avoid losing money. But very often, when you have the strongest emotional urge to step out of the market, you will create the very outcome you fear.
Why market timing doesn’t work
Let’s look at 401Ks specifically right now. 401Ks are a tool for retirement. It’s part of your buy-and-hold investment strategy. You put money into it, it grows over time. Then you take your money out when you retire.
Watching the stock market report every day, or several times a day, will just stir up your emotions and perhaps cause you to make an unwise decision to stop your 401K contributions. You might think that you can always just step right back in when the market looks to be recovering, but by the time you see the indications you’re looking for, it’s already too late.
Here’s why: when the stock market dips low, that’s a great time for fund managers to buy stocks at bargain rates. Your 401K in particular acquires the ‘seeds’ that grow into profitable investments. Think of it like a big sale at your favorite store: items are ‘on sale,’ so you can get so much more for yourself and for your family.
Timing the market is a false illusion
The media fuels anxiety by trotting two stock market experts onto their shows who say they played the stock market game right. Timing the market usually involves stepping out of investing and knowing just when to step back in to their great advantage.
But fast forward a few months, and the stock market programs have two different investment experts who say they played the stock market game right. This creates an illusion that ‘if these guys and gals can time a stoppage and return to the stock market, so can I!’
That illusion can be very costly.
These media programs have hundreds if not thousands of investment experts to choose from and they pick the two who happened to have benefited from the stock market.
There are many reasons why timing the market doesn’t work. One is that you aren’t smarter than the market and if you plan to step out of investing until the stock market appears to be beneficial to you, you’ve probably already missed out.
A better investment strategy
When you’re in your 50s or below and you have a good 15 years before your retirement, you should be willing to take risks and make systematic contributions to your 401K via direct deposits from your paycheck. This way, you don’t have to think about it all the time, nor make day-to-day decisions. Those automatic investments are working for you, and growing your number of shares.
The key here is knowing the risks you’re willing to take as you do make those automatic contributions. A qualified financial planner can help you navigate your risk level, helping you find the right level of risk tolerance for you.
Once you have set your risk tolerance, then you can look into diversifying your portfolio, getting the right ratio of stocks and bonds to work optimally for you. Then – and this is an important detail – you will work with your financial planner to re-balance your portfolio over time. That’s where your best and smartest work lies, not in a futile attempt to read the stock market.
Time in the market is more important than timing the market
Put the media’s noise aside and don’t get shaken by the daily fear stories on the news. Train yourself to stomach those dips in the stock market, because that’s when the acquiring happens. Soon, you’ll see opportunity in those stock market dips, and you may even get excited about them.
We know it’s hard to fight your emotions when it’s your retirement on the line, but history shows that when you have 15+ years until your retirement, time is on your side. You should keep putting your money into your 401Ks rather than sitting on the sidelines. And if your company matches your 401K contributions, you’ll want to be in on that gain for your diversified portfolio over time.
Contribute to your 401K on a regular basis and work with your financial planner to customize your own particular balanced portfolio, re-balancing it periodically.
Time is on your side
Don’t worry about what’s going on in the short term, and don’t let your emotions take over if you have 15+ years to go until your retirement. If you’re closer to retirement, talk with your financial advisor about strategies that can serve you best when it comes to your 401Ks and all of your investments.
For more details, listen to our podcast and let us know if you’d like us to help you with your investment planning. We’re watching the stock market as well and we can provide a different point of view that may calm your anxieties a bit so that you can keep your 401K healthy and working well for you.