Stock market dips and economic downturns are valid reasons to feel nervous about investing. You may be tempted to sell and sit out the market in times like these. But staying invested in a bear market can pay off.
If you're wondering whether to continue investing in your 401k or other retirement accounts during a market downturn, the logical response is yes. We believe that investing long-term helps ensure you're in the right position to capture what the market offers.
Another unique benefit of staying invested is the ability to dollar cost average. This means when the markets go down, you're buying investments cheaply. We’ll explain what dollar cost averaging is and more in this post, covering four solid reasons to keep investing in your 401Ks, IRAs, and other investment accounts.
Why You Should Keep Investing When the Market is Down
1. A Recession Is Not a Reason to Sell
Are we in a recession? Maybe, maybe not. Either way, market downturns can be unsettling. But the good news is, recessions are only temporary. Over the past century, US stocks have averaged positive returns over one-year, three-year, and five-year periods following a steep decline.
The start of the pandemic in 2020 is a clear example. The global economy was threatened, causing major stock indexes to drop sharply in the first quarter. But as companies adapted to the situation and learned more about the disease, the market quickly bounced back to positive returns.
While talk of a recession may be intimidating, it's essential to understand that the market ebbs and flows. You can't predict what the market will do. If you sell during a market downturn, you could ruin your long-term investment strategy and potentially lose a lot of money.
2. What Goes Down Must Come Back Up
Pulling out your investments when the markets are down is tempting. You may think you stand to lose more money if you don't sell. But keep calm, your money isn't disappearing. In the long run, your portfolio could even become worth more than before the downturn. How?
A market downturn means lower prices. When share prices eventually rebound (and historical data shows they will), people who keep investing will reap the benefits. That’s why now is an excellent time to consider dollar cost averaging.
What is Dollar Cost Averaging?
Dollar cost averaging is the practice of investing the same amount of money at regular intervals into your 401K or Individual Retirement Account (IRA), regardless of the market price.
When you have a retirement plan that has a payroll deduction attached to it, you buy investments at a lower price in a down market. It's like buying on sale, especially if you're far from retirement and don't need the funds for emergencies.
Dollar-cost averaging is key in down markets when you're far from your retirement goals. It helps you:
- Avoid mistiming the market
- Take emotions out of your investing decisions, and
- Think in the long-term
If you're dollar-cost-averaging, you'll be buying when people are selling out of panic, and positioning yourself for long-term gains. Because the market tends to go up over time, a down market is an investment opportunity rather than a threat.
3. 401Ks Are Long-Term Vehicles (So There’s Time to Recover)
Unless you're already on the verge of retirement, your retirement funds are off limits for the near future—long enough to witness another market cycle or more. 401Ks are designed to be long-term investments, free from the fluctuations of up and down balance movements.
So if there's a bear market or recession, you can feel confident that the market will not zero your 401k balance. At some point, the market will eventually shift back to growth, giving you time to recover any losses.
4. The Right Investment Plan is Built to Withstand Ups and Downs
One of the best ways to deal with volatile markets and disappointing returns is to have planned for them. An investment plan helps you keep your financial goals in check and your eye on the long-term prize.
To have a successful investment experience, you need a roadmap. An investment process is that map, helping you handle surprises and stay calm instead of making rash decisions..
At Wealth Legacy Institute, there are four principles that guide us in building your retirement plan:
- Invest for the long term
- Balance risk and return in alignment with your goals, attitudes, and values
- Utilize the six factors of return to prevent feelings from getting in the way of intelligent decisions
- Diversify globally to safeguard against fear and concern
Remember, you can't time the market or the public's reaction to market fluctuations. But you can stay the course with an investment process and achieve your financial goals without stress.
Now Is a Good Time to Reassess Your Investment Portfolio (and Your Larger Financial Plan)
We've seen many new trends and fads in the last few that swayed some investors. You've probably heard of GameStop Meme stocks that resulted in a short squeeze, with victims shutting down due to heavy losses. Other investment trends, like NFTs, crypto, green investing, and more, have received media buzz and investor interest.
Even if you didn't participate in any of these trends, your situation might have changed over the last two years—for example your job, location, goals, or tax status. If so, now is an excellent time to review your retirement investment plans.
A fiduciary financial advisor can help you reassess your financial approach toward investment and create a long-term financial plan that takes into account your ideal retirement lifestyle and financial goals.
At Wealth Legacy Institute, we offer investment insights to help limit the effect of market downturns on your long and short-term goals. Sometimes, that includes adjusting your priorities as they change over time.
Do you need a financial advisor to help you build an investment plan that can withstand stock market volatility? Contact us today.
Disclosure: For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third-party data which may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Indices are unmanaged baskets of securities and are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Total return includes reinvestment of dividends and capital gains. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements, or representations whatsoever by us regarding third-party websites. Wealth Legacy Institute is not responsible for the content, availability, or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products, or services available on or through these third-party websites. The opinions expressed by featured authors are their own and may not accurately reflect those of Wealth Legacy Institute®.