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The Move You're Going to Regret

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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:

Dayana Yochim reinvests her dividends, eats her leafy greens, and doesn't invest any money in the market that she might need in the next five years. The Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (13)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 22, 2009, at 11:19 AM, FinancialFellow wrote:

    I can understand how it's hard to deal with large market drops. I've seen my retirement accounts drop 40% since the end of 2007. Fortunately I'm still early on in my career (30 years old) so I should have plenty of time to recover. That said the urge to sell hit me as well. When I first starting in the market it was during the middle of the 2000-2002 bear market. From 2003 - 2007 I saw double digit gains each year. Last year pretty much erased all those gains but, the bull Market from 2003 - 2007 showed me that another bull market will come. The author provides good advice - don't forget that these things happen in cycles. This is just a really bad down cycle.

    I've used the current down market as an opportunity to buy more stocks. There's a lot of online brokers out there so I took the time to compare them. Here's what I found:

  • Report this Comment On January 30, 2009, at 5:15 PM, Notsorich48 wrote:

    Too bad many of us will not be allowed to follow this good advice. Lots of companies have suspended company matching this year, so their 401(k) plans are no longer automatically qualified. They will be subjected to the ADP/ACP tests, which means how much a higher income earner can contribute depends on how much the lower income earners contribute.

    $16,500 limit? Hah! I'll be lucky if I'm allowed to contribute $4000 this year. Congress should suspend those rules for this year. Some of us want to invest in our markets, and have the means to do so...just not the legal authority to do so.

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