Bear markets can be emotional times as investment balances decline and the economy slows. Potential concerns about layoffs and budget cuts are also often raised. It’s certainly tempting to reduce your contributions to your retirement fund to try to avoid further losses, or to save a cash position to invest when things “get better,” but doing so can hurt yourself long-term because when you figure out that things are getting better , the recovery may have passed. Now more than ever is the time to think about dollar cost averaging and buying at a lower price.
401(k)s are long-term tools with time to recover
Unless you’re already on the cusp of retirement, your 401(k) fund will be off-limits for the foreseeable future — of course, at least seeing a market cycle, if not more. Early withdrawals from your 401(k) are subject to hefty penalties, except under specified circumstances, and not only will you face a 10% tax penalty, but you may be pushed into a higher tax bracket as it will be related to Your normal income for the year. This is all by design, as a 401(k) account is supposed to be a long-term investment vehicle, free from the vagaries of daily balance fluctuations.
Of course, that’s not to say they’re completely untouchable, as having a hardship withdrawal allows you to tap into your balance in an emergency, such as preventing foreclosure or eviction. Additionally, loans allow you to keep your balance for whatever reason you wish, with the expectation that you will pay yourself back over the next few years (or face the aforementioned penalty.)
Remember that while this may take time, historically, markets have always recovered. There have been 16 bear markets since 1929, and the market returns to its original level after an average of three to four years (this includes extreme outliers, the Great Depression.) If you are at least that long away from retirement, you will feel Believe that continuing your donation (or even increasing it) is a financially prudent decision.
Investment opportunity seems reasonably priced
Considering the emotions a bear market can trigger, you might think that by continuing to contribute to your balance and seeing it trend down, you’re throwing away good money again and again. It’s also perfectly understandable, as you might feel that the money might be suitable for a more immediate, pressing need, such as supporting an emergency savings fund.
However, the balance should not be your main concern, but rather your number of shares. As prices drop, it’s getting easier to snap up shares at acceptable prices. When the market recovers, as it eventually does, putting in the work by adding these extra stocks means you’ll have a chance to gain.
There’s a term called “buying the dip,” and it’s a well-known investment strategy. While “buying the dip” for a single stock means you take all the risk for that particular company, which can lead to catastrophic results (returns are never guaranteed), doing so in a balanced portfolio of many assets can greatly reduce this risk risk, while still allowing you to make good progress in increasing your overall stock count.
Your game still matters – it matters
401k matches are very common, with 98% of plans offering matches, which are in the 6% range. In any case, you want to get the game for the bare minimum, because not doing so is simply and unnecessarily leaving money on the table. If you contribute 6% while your employer is converting dollars to dollars, your investment will have to lose a staggering 50% from then on to get you back into balance.
Investing in a 401(k) with tournaments is like playing poker with house money — even if you try, it’s hard to get behind. The only problem is that you have to contribute enough to get that game, but that shows how important it is to keep your contributions going even in adverse economic conditions.
save it till it hurts
A bear market and its cheaper stocks may be your best chance to support your retirement account. While a 401(k) does keep your assets fairly locked up until you retire, you do have a way to access this money in an emergency that really jeopardizes your home loss. So you can be confident by “save until it hurts” that because you have acquired the knowledge you can effectively manage the risk that you will be able to ruin yourself by doing so.
Brian Menickella is co-founder and managing partner of The Beacon Group of Companies, a broad-based financial services firm headquartered in King of Prussia, Pennsylvania.
Securities and advisory services provided through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
This material is for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice.
Investing involves risk, including loss of principal. No strategy, including dollar cost averaging, can guarantee profits or prevent losses.
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