The article below was published by Sharon Epperson on cnbc.com that talks about the importance of consistently participating in your 401k through the high’s and low’s of the market.
Uncertainty often makes investors fearful about their investments, and many rush to sell. Yet, in the wake of the government shutdown and debt ceiling debate, a new study shows that maintaining direction through financial crises can have significantly payoffs for retirement savers.
“Investors feel helpless, and when they feel helpless they go straight to cash,” said certified financial planner Stacy Francis, president and CEO of Francis Financial, a New York-based investment advisory firm. “But if you keep saving and rebalancing your portfolio, you’ll feel more in control.”
And after the dust settles, you may also see big returns.
Take the bear market in 2008. Many pulled money out of stocks and stock mutual funds in their 401(k)s and retirement plans as the market plunged. The S&P 500 index plummeted nearly 40 percent that year. But since bottoming out in 2009, the S&P 500 is up more than 150 percent.
Many investors who have consistently participated in their 401(k) plans have seen big gains. In fact, they saw their 401(k) account balances rise by an average 23.5 percent from 2007 through 2011, according to the study, by the Investment Company Institute and Employee Benefit Research Institute.
Consistent savers saw an average $28,000 increase in their 401(k) balances, from about $76,500 at the end of 2007 to more than $94,000 at the end of 2011, the institutes found. Meanwhile, the average balance for all 401(k) investors fell about $6,000 in that period, to $59,000 from $65,000.
Financial advisors say workers who save regularly in a 401(k) or employer-sponsored retirement plan are at an advantage when the markets face rough patches, especially if their employer matches their contributions.
“Somebody who is still working, employed and saving can take advantage of a crisis by putting new money to work at potentially lower prices and that’s really how wealth is created,” said Timothy Courtney, chief investment officer at Exencial Wealth Advisors in Oklahoma City. “By accumulating shares and accumulating wealth at lower prices, then when a recovery does come, your wealth begins to compound.”
Financial advisors also suggest rebalancing a 401(k) or other retirement account portfolio with a mix of assets to help to ensure long-term growth.
Susan Fulton, co-founder of FBB Capital Partners in Washington, advises 401(k) savers to pick a percentage of their salary to be deducted and invested in your 401(k), chose a simple allocation of stocks and bonds, and stick to it.
Francis said investors should “take profits when you need to and rebalance at least twice a year.” Such rebalancing “can add 1 or 2 percentage points to your return and can help you withstand those large drops in the market,” she said.
Consistently saving, regularly rebalancing and staying the course with your 401(k) will also help you build confidence for the next time—and it will come—the financial markets face a crisis.
By CNBC’s Sharon Epperson