Stock Market Fluctuation: Why Shouldn't You Sell When the Market's Down?
Success in free markets can be simply summarized by “buying low and selling high”. The only way to fully optimize this investment strategy is to dust off the DeLorean and go to the future. For the people who do not have the ability to time travel, what should you be doing with your 401(k) plan during these turbulent times?
According to Alight Solutions, there was greater 401(k) investment trading activity in the last week of February than the entire 4th quarter of 2019. Ever since 401(k)s replaced pension plans as the primary retirement vehicle in this country, 401(k) participants have been left to manage their own investments, which also replaced the data-driven financial professionals who manage pension plan accounts. During this pandemic and the gloomy news reports and dropping 401(k) account balances, many individuals are choosing to move their money into a “safe” investment. In other words, they are selling low and could be doing irreversible harm to their nest egg.
The S&P 500 from 1957 to 2018 has averaged about 8% annually. March 13th and 24th 2020 alone had a one-day gain of over 9%. To put that in perspective, if you were sitting out of the market for that one week, it would, on average, take over a year to make that up. This is why financial professionals keep using terms like long-term, time horizon, and buy and hold. If you are investing in a 401(k) plan and have 20, 30 and even 40 years until these funds will be used, there are going to be short-term drops in the market. The nice thing about the nature of 401(k) plans is that they are being contributed to each pay period which naturally means dollar-cost-averaging is also mitigating losses by being able to buy stock funds at a lower price.
You don’t need a time-traveling DeLorean to keep your retirement goals on track during these turbulent times. All you need is to keep in mind the variables that you can control:
Don’t sell low. 401(k) plans are long-term investments.
Keep contributing if you can. Buying low right now accumulates more shares in your account than you would have at the market’s peak.
Use low-cost options if possible. A 1% increase in fees during a lifetime can cost you 10 years of retirement income.
If you are within 5 years of retirement, start consulting with a financial planner to map retirement.
