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With the stock market having taken another trip down yesterday, plenty of investors are thinking more about how to get out of stocks while the getting's good than about what they can do to earn big gains in the years to come. That might seem like a smart move if stocks continue to trade choppily in the near future, but in the long run, it could cost you more than you might expect.

The cost of being on the sidelines
Fidelity Investments recently issued its quarterly report on the trends it sees from its 401(k) participants. With more than 11.6 million participants in more than 20,000 employer plans across the country, Fidelity's data gives a very broad look at what ordinary people are doing with their retirement savings.

The news from Fidelity's second-quarter report was largely positive. Account balances were up, but more important, participants have upped their annual contributions by about 11% since 2006, to an average of $5,790. In addition, more than twice as many participants increased the amount they contributed than decreased it.

But the more interesting takeaway from the report comes from a historical retrospective it included. Fidelity looked at those participants who made the mistake of getting rid of all their stock exposure during the market meltdown of late 2008 and early 2009 and analyzed their performance since then. The study then compared that to the performance of those who kept their equity allocations roughly constant.

The results were eye-opening. Those who sold out and never got back into stocks saw their account balances rise by only 2% from 2009 until June 30. Those who initially got out of the stock market but later got back in saw, on average, 25% gains in their accounts. By contrast, those who stayed in stocks the whole time saw their balances rise by 50%.

Moreover, the report found a similar disparity between those who stopped contributing to their retirement accounts and those who kept making regular contributions. Regular participants saw a 64% jump in their balances, versus just 26% for those who curtailed their investments.

How to stay the course
When times are good and the markets are calm, it's easy to say that the next time a crisis hits, you won't make the mistake of dumping everything at the bottom. But when the crash actually comes, your emotions can get the better of you. How can you make it as easy on yourself as possible to keep your retirement savings on track?

For one thing, make sure you understand your investment options. Most plans have more than one type of stock mutual fund, and they can be vastly different from one another.

If you're nervous about the market, look for the kinds of stocks that won't give you a stomach-churning ride. Most 401(k)s don't let you pick exchange-traded funds like SPDR Dividend (NYSE: SDY  ) , which invests in dividend stocks that tend not to move as much during bear markets. But funds that have "equity income" or "growth and income" as a strategy are much more likely to focus on less volatile stocks that pay high dividends. Coca-Cola (NYSE: KO  ) , IBM (NYSE: IBM  ) , and Wal-Mart (NYSE: WMT  ) combine the attractive attributes of low valuations with below-average volatility, and while most 401(k) plans won't let you invest in them directly, equity income funds will have them and similar stocks among their top holdings.

Furthermore, remember that in many cases, continuing to contribute to your 401(k) will give you a match from your employer. Even after tough times forced dozens of companies to suspend employer matching, many of them, including Ford (NYSE: F  ) , Starbucks (Nasdaq: SBUX  ) , and American Express (NYSE: AXP  ) , reinstated them once the financial crisis had abated. From their perspective, retaining quality workers by restoring benefits became a necessity to compete. But from your perspective, with returns so hard to come by, you can't afford to pass up the free money that an employer match represents.

Don't quit!
When markets get choppy, the temptation to get away from the pain by selling your stocks gets hard to resist. But with huge gains potentially at stake, you really can't afford to be cute with your retirement savings. Find a good long-term strategy and stick with it, and it will serve you well both now and when things get better.

Dividend stocks can be very useful outside your retirement accounts as well. The Fool has 13 promising dividend-paying companies you really need to take a closer look at.

Fool contributor Dan Caplinger wishes everyone had the luxury of picking whatever they wanted in their 401(k)s. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of IBM, Ford, Wal-Mart, Starbucks, and Coca-Cola. Motley Fool newsletter services have recommended buying shares of Ford, Wal-Mart, Coca-Cola, and Starbucks, as well as creating a diagonal call position on Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy won't let you miss out on anything.

Read/Post Comments (6) | Recommend This Article (18)

Comments from our Foolish Readers

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 August 19, 2011, at 5:34 PM, n4g4 wrote:

    A broken record. But what about the people who got out as it was sliding down and got back in on the way up? No one can time the market... sure, sure. But it seems common sense when the market is in a free fall to get out before you hit bottom, and keep a close watch on it so you don't miss the ride up. Is that so impossible? Do the really smart investors who give this sage advice actually sit back and not try to take advantage of major market swings? It just feels like they want the common investor to act like sheep to keep the market "less emotional" and therefore more stable so the wolves can make out like bandits. I'm sure Dan has just sat back confidently and watched the market swallow 15% of his investments. Sorry Dan, I just don't buy it. I would rather hear about how to take advantage of major market swings than about how to sit on my hands and "bah".

  • Report this Comment On August 19, 2011, at 5:57 PM, xetn wrote:

    And of course this time will be just like March 2009.

  • Report this Comment On August 19, 2011, at 8:10 PM, azmfool wrote:

    Hi, N4. It appears you are already aware that what you are suggesting is sacrilige around here. It's been proven time and again that market timing is a sure way to lose equity.

    Also, you seemed to have missed the point that the article's data came from 401K's, not traditional accounts. Some 401K administrators (Hello-o-o-o Securian) will only let you return funds incrementally from a cash account back into mutual over a period of a few years. In that case, you will have sought safe harbor during the market upheaval and missed the tremendous gaines. Keep in mind that market reaction is often emotional and psychological, not fundamental. That's why we are having wild swings in the market.

    I won't make it my job to talk you out of it, but if market timing is what you're looking for, you won't find it here. I hope instead of chasing you away, you check out the free Fool's school. In case you're wondering, I am a long time member, but I don't work here or derive any benefit from recommending them.

  • Report this Comment On August 19, 2011, at 10:19 PM, Robj2 wrote:

    Market timing is highly problematic. I generally use a diversification/allocation system.

    However, when market sectors seem out of wack (a la the S&P/Dow and tech run up in the late 1999-2001, as well as 2006-7 with the housing/stock bubble, I played with allocations.

    I shifted 2-3x overpriced Dow/S&P into low multiple small/mid value beginning in 1998. It took 3-6 years to pay off, but it paid off big time.

    And in the housing bubble, I shifted profits since early 2006 through 2008 into cash, keeping my original stock allocation (+ some but not the majority of gains) but shifting profits into cash and bonds. I started moving more of my allocation into stocks towards the end of 2008 and started shifting bond allocation shorter end (gave up some gains there but was able to sleep).

    I give myself up to 5% change in an area allocation if I feel it is significantly mispriced. Is that market timing? Yes. Is it balancing--yes, sort of. Did it work in late 1999-2003 and 2006-2009? Hell yes. Did I underperform in 2010? Yes. Did I care? No.

    I've moved to a 50-50 allocation since I turned 50 several years ago and preserving capital is a big issue. 10 years ago I was at a 80-20 allocation and only because I thought stocks, save small/mid value, were way overpriced.

    Risk/reward. If I'm buying stock, I'm not buying it at 26 PE, no matter how much the experts are telling me it's all different now and that I can't outthink the market. The whole dang market was momentum investing back then.

    I tend to agree that 75% of the time, sticking with allocations and being "fully invested" in your allocation makes sense.

    When the market has its head up its rear in terms of risk/reward, I call time out. I don't care if that seems foolish. I don't want to lose 50% when the market goes from 25 PE to 13 PE and I think the latter is a better valuation.

    The articles on Buffet seem to suggest a certain wisdom of feeling like you're being paid to risk capital in the casino. When the market tells me PEs at 26 are "fairly valued," well, I call BS on Mr. Market.

    Sorry, fools.

    The market can be irration for a bubble, but when rationality hits, there goes 50% of your value.

    That said, I don't change my allocation percentages very often, about once every 4-5 years. Usually, the market seems pretty rational.

    When it swings 5% per day, well, rationality and rational market theories suggest to me the market went off its meds.

  • Report this Comment On August 20, 2011, at 1:46 AM, dbtheonly wrote:


    That's exactly the argument the Technical Analysts need to make when they see the next inverse "Head & Shoulders", 'Cup", Flag", "Bell", "Whistle", "Death Cross", Hindenburg", "Death Star", or whatever.

    It may not be the equivalent of March of 2009 now. Or ever. It is August of 2011 with its' own challenges & opportunities.

    "Buy & Hold" is not "Fire & Forget" but no one, no one, can accurately what will happen to a particular stock on a daily basis. That "foolishness" is the basis of wisdom.

  • Report this Comment On August 20, 2011, at 4:30 AM, n4g4 wrote:

    Thanks for the input Robj2.

    I'm not trying to predict what the market is going to do on a day to day, or even week to week basis. I believe in buy and hold under normal circumstances. These are not normal circumstances. If you look at a timeline of what was going on previous to the 2008 collapse, at what point are you going to start reshuffling you asset allocation? The day after the crash... uh, no. I don't have a crystal ball but some things appear obvious. There is nothing positive developing on the European Union front. The Fed has all but conceded we are heading towards a recession, and the greatest irony of all is that the S&P is getting attacked for finally doing it's job. I'm going to shoot for the 75%-100% gain instead of settling for 50%. The only risk I see is that I might end up with in the 30%-40% range.

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