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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.
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.