Economic times are turbulent with the sub-prime lending issues, a struggling real estate market and the occasional mention of an all-out recession. Investors can get a little uneasy about retirement savings in a less than favorable market, but tread carefully. One of the worst things you can do in this situation is panic and start messing with your 401(k).
While the economy can be unsettling to say the least, it does not have to wreak havoc on your retirement plan. The best course of action is to stick to your 401(k) game plan — contribute regularly, don’t make rash decisions, and don’t completely liquidate.
The reason this works is dollar-cost averaging. Dollar cost averaging has been proven to be a good investment strategy for a variety of reasons. First, you avoid overexposing your investment to the risks involved in timing the market. Second, you are loyal to the plan and consistently invest your money on a regular basis. As most wise investors know, consistent investing is the key to successful investing. By allowing your 401(k) to operate as it is intended, you systematically put away a portion of your paycheck, tax-free, for retirement investment.
Contributions keep pace with your paycheck schedule, and thus spread the investment purchases over time and keep them consistent. The strategy is tried and true: slowly buy small amounts of stock or bonds over a longer period of time at a set rate.
Of course, time is a factor as well. If you are a couple years away from retirement and the market takes a hit, then your stock investments are likely to take a hit regardless. However, if time is on your side and you can wait out the storm then your best bet is to let your 401(k) do its job. Remember, your 401(k) must be diversified with a good mix of stocks and bonds, and should follow some general investing guidelines as we’ve discussed in previous issues. Regardless of the ups and downs in the market, resist the urge to liquidate your retirement plan and you’ll wind up better off.