Don't let it get away!
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A recent survey from TD AMERITRADE finds that 35% of Americans have cut back the amount they're contributing to their retirement plans -- and, get this, 63% have stopped adding any new money at all.
Bad move, people. You're going to regret that in the future.
The problem with stopping the savings clock
Let's take a look at what happens to those who stop investing during a downturn (or, worse, pull their money out of the market). In a nutshell, they get hosed. By way of example, let's roll the tape:
- Those who invested in the stock market from 1963 through 1993 -- keeping their money in the market for the entire 7,802 days -- got to enjoy an average annual return of 11.83%.
- Those who let short-term volatility get the best of them, thus missing the 10 best up days out of the nearly 8,000 during which they could have been invested, clocked in with 10.17% over the same time period.
- Investors whose money was out of commission for 30 of the best days yielded just an 8% average annual return.
- And what if you missed the 90 best days? Hope you're happy with 3.28%.
These findings -- the results of a study conducted by University of Michigan finance professor H. Nejat Seyhun for Towneley Capital Management -- illustrate four fundamental investing truths:
1. When the market comes back, it doesn't waste time. Most of the gains happen on just a few days (like last Oct. 13, when we saw a record 11% one-day run-up).
2. Getting out before the sell-off is only half the equation: Even if you stopped investing and sold all your stocks precisely before the market tanked, you'd have to time your way back in just as accurately if you wanted to reap the full rewards of an upturn. In other words, you've got to be right twice. And that's a strategy that no one -- not even the best investors in the world -- has been able to do consistently over time.
3. Really, no one can consistently time the market, so don't even try.
4. I'm serious.
So, how do you stomach days like Dec. 1, 2008, when the Dow dropped 680 points, dragging your portfolio down nearly 8%? Think of it like real estate -- when housing prices are through the roof, it's best to be on the sell side of the equation. And when prices are tanking? It's a buyer's market, baby!
What we have right now on Wall Street is a classic buyer's market. And unless you plan on working for the rest of your life, then you, my friend, are sitting on the right side of the table for this transaction.
The rewards of sticking it out
Here's how the equation plays out in your retirement account -- you know, the one to which you have now vowed to continue to contribute.
Let's say you're fully funding your 401(k) (up to the $16,500 maximum contribution limit) and get paid every two weeks. Twice a month, you sock away $687.50 into an S&P 500 index fund. Back in 2007, that would've bought you four or five shares of the fund. But at today's prices, that same amount of money buys you over eight shares.
In other words, you're getting a lot more shares for your investment dollars -- on top of the additional shares you get by reinvesting dividends (which automatically happens in most retirement accounts). When the stock market starts to recover (and it will), by sticking with an investment plan, you'll get supercharged returns.
Don't stop thinkin' about tomorrow
I know it takes nerves of steel to stay invested -- and to keep adding to your retirement account -- in a market like this one. But it's worth it. There is no other way to guarantee that you'll be in the market on the handful of days where it really counts.
So, re-cast how you view the downturns (buying opportunities!), and remember that calling it quits is ultimately bad for your long-term bottom line.
Need a nudge to start saving? Here, these should help: