Bear markets can be emotionally charged times as investment balances fall and the economy slows. Potential concerns about layoffs and cutbacks often crop up as well. It can certainly be tempting to cut your contributions to pension funds to avoid further losses, or to save cash to invest when things get “better”, but by doing so you could be harming yourself in the long run, as by the time you figure out that things are getting better, the recovery may already be over. Now more than ever is a good time to consider the dollar cost average and buy at lower prices.
401(k)s are long term vehicles and there is time to recover
Unless you’re already on the cusp of retirement, your 401(k) funds will be off limits for the foreseeable future — certainly long enough to see at least one more market cycle, if not more. Withdrawing from your 401(k) early, except in prescribed situations, has huge penalties, and you will not only see a 10% tax penalty, but may also be pushed into a higher tax bracket as this is combined with your normal annual income. This is all designed that way, as 401(k) accounts are supposed to be long-term investment vehicles, free from the vagaries of daily up-and-down balance movements.
Of course, that’s not to say they’re completely untouchable, as there are hardship withdrawals that let you use your balance for emergencies, such as avoiding foreclosure or eviction. Plus, loans allow you to keep your balance for whatever reason, with the expectation that you’ll pay yourself back over the next few years (or else face the aforementioned penalty).
Remember that while it may take time in the past, the market has always recovered. There have been 16 bear markets since 1929 and the markets have bounced back on average three to four years later (including the extreme outlier that was the Great Depression). convinced that continuing to make (or even increasing) your contributions is a financially sound decision.
Investment opportunities seem well priced
Given the emotions a bear market can evoke, you might think you’re throwing good money after bad by continuing to contribute to your balance and watching it go down anyway. It’s also completely understandable, because you might think money is suitable for a more immediate, urgent need, such as bolstering an emergency savings fund.
However, the balance should not be your main focus, but your number of shares. As prices fall, it becomes easier and easier to grab stocks at a comfortable price. When the market recovers, as it always eventually has, it means that you’ve put in the work of raising those extra shares, you’ll have a chance to reap the rewards.
There’s a term for it called “buying the dip” and it’s a well-known investment strategy. While “buying the dip” in individual stocks means taking on all the risk in that particular company, which could lead to catastrophic consequences (returns are never guaranteed), in a well-balanced portfolio across many assets, you mitigate this risk to a great extent, while still allowing you to make good progress in strengthening your overall share numbers.
Your match is still important – a lot
401k matches are overwhelmingly common with 98% of plans offering a match with that match being close to 6%. You want to contribute the minimum amount to get that match no matter what, because if you don’t, you’re simply and unnecessarily leaving money on the table. If you contribute 6% with a dollar-for-dollar match by your employer, your investments should lose as much as 50% from then on just to bring you back to awhile.
Investing in a 401(k) with a match is like playing poker with the house money – it’s incredibly hard to get left behind, even if you try. The only downside is that you have to contribute enough to get that match, but it shows how important it is to keep your contributions going, even in adverse economic conditions.
Save till it hurts
Bear markets, with their lower priced stocks, are arguably the best opportunity you have to bolster your retirement accounts. While 401(k)s keep your assets fairly locked up until it’s time to retire, in a real emergency that threatens the loss of your home, you have ways to access that money. Therefore, by “saving until it hurts” with the knowledge you have acquired, you can be confident that you are in a position to significantly control the risk of ever destroying yourself as a result.
Brian Menickella is co-founder and managing partner at The Beacon Group of Companiesa broad financial services company based in King of Prussia, PA.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA†SIPC†
This material is made for educational and informational purposes only and is not intended to constitute ERISA, tax, legal, or investment advice.
Investing involves risks, including loss of principal. No strategy, including dollar cost averaging, insures profit or protects against loss.
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