The stock market has been a disappointment for many investors lately, with the S&P 500 experiencing the worst performance in around 50 years during the first half of 2022. As a result, it wouldn't be surprising if you were wary of continuing to put more money into the market.
But while you may be thinking about a pause to your 401(k) contributions out of fear the downturn will continue, there are three big reasons why stopping or reducing your investments would be the wrong financial move.
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1. You might get a 401(k) match
Most people who have a workplace 401(k) are entitled to at least some matching contributions from an employer. The rules for how this works vary by job, though. Some people get a 100% match up to a certain percentage of their salary, while others may get a less generous 50% match. You can find out the specifics by talking with your plan administrator.
Regardless of exactly how much your employer matches, the bottom line is that this is free money that is guaranteed to you -- and it could provide you as much as a 100% return immediately if all your contributions are matched on a dollar-for-dollar basis. If you stop contributing to your 401(k), you will pass up these generous returns, which are the only guaranteed ones you'll ever see.
2. Retirement investing is for the long term
There's another big reason not to pause 401(k) investing even if you're concerned about how the market will perform in the short term.
The simple reality is that when you are investing for retirement, you should be making a long-term investment. You don't want to try to time the market or pause your contributions during downturns, because over time the market has always recovered and produced generous returns.
If you pause your investments and you mistime when you want to get back into the market, you could miss a rally and end up having to buy assets at a much higher price than if you'd been investing steadily all along. You are far better off just being consistent in putting money into your account and investing through good times and bad, as this is proven to be a far more effective approach to building wealth than trying to time the market.
3. You could get investments at a discount when the market goes down
Finally, the last big reason why it doesn't make sense to pause 401(k) investments during a downturn is that you could miss out on the chance to buy shares at a discount.
When a market crash happens, especially if it is spurred by bad economic news such as a recession, the share price of really great companies sometimes falls temporarily. These companies can stand the test of time, recover, and keep growing long after the recovery has occurred. So why not buy shares of them when they are on sale?
Ultimately, you should stick with your current investing plans -- or even consider increasing the amount you want to invest -- so you don't miss out on the potential to earn generous returns that could go a long way toward helping you build wealth for your future.
