This year, the S&P 500 dipped 20% before crawling back to a 12% loss. Your 401(k) balance is probably moving up and down along with the benchmark index -- and I'm guessing that's not making you feel awesome about investing.

You're right to ask the question: Should I keep investing in my 401(k) right now? For most people, the answer is yes. Read on to find out why that is, and when you should make an exception.

Down markets are efficient for 401(k) investors

Since the advent of public stock trading, stock prices have moved up and down in waves. While the stock market goes up more than it goes down, those down cycles can feel more pronounced. Time flies when your 401(k) balance is growing, but it drags when your balance is shrinking.

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The thing is, continuing to invest in your 401(k) gives you a better chance of robust long-term growth. Here are two reasons why:

  1. It's efficient to invest when share prices are down. You get more shares this month for the same contribution you made last month. More shares mean greater growth potential later.
  2. Market cycles are unpredictable. You can't predict when bear or bull markets start and end. The only way to manage that unpredictability is to continue investing regardless of the investing climate. But here's some food for thought: Even if you had a crystal ball, you'd still invest in down markets. After all, why pay more for shares if you could pay less? The crystal ball would only prevent you from selling in a down market, because you'd see the recovery coming.

About 401(k) investing in down markets

You might naturally feel nervous about continuing to invest while share prices are falling. There are two protective measures investors take during bear markets. They are:

  1. Only invest money you won't need for at least five years. This gives you the flexibility to wait for a recovery, and higher share prices, before you must liquidate.
  2. Invest in safer stocks, rather than speculative stocks. Unproven companies can show more volatility in tough markets versus, say, blue chip stocks.

You may already be taking these actions in your 401(k). If you're younger than 50, you shouldn't be withdrawing money for at least five years, or possibly 10. And your investment menu may not even offer speculative fund options.

Still, it's smart to check in on your investment selections. Make sure most of your contribution is allocated to a large-cap or S&P 500 index fund.

When you should not invest in a down market

Now for the scenarios when you shouldn't invest in your 401(k) during a down market. It can be a bad idea keep investing when you have low cash reserves and your job outlook is unstable or you're planning to retire soon.

  • Low cash reserves: You should have enough cash on hand to cover three to six months of living expenses. If you don't, it might make sense to lower or pause 401(k) contributions to build up your cash.
  • Unstable job outlook: If you're worried about getting laid off and you have low cash reserves, don't lock up too much money in your 401(k). It's counterproductive if you end up taking a hardship withdrawal later. Save in cash until you're comfortable you can survive temporarily without your job.
  • Retiring within five years: When you retire, you take distributions. To fund those distributions, you normally must sell shares. It's not ideal to liquidate in a down market, because you get less cash in those transactions. You might have the option to delay retirement. In that case, it's appropriate to keep investing. If you can't or won't delay retirement, you might trim your 401(k) contributions in favor of higher cash deposits. Your cash fund can cover some of your living expenses if the down market lingers.

This market won't break your retirement

At some point, the stock market will shift back to growth. Whether that happens this year or two years from now, no one knows. But either way, it shouldn't break your retirement or zero out your 401(k) balance.

If your retirement timeline and cash reserves allow it, continuing to invest now could reap big rewards later. And seeing big, unrealized gains in your 401(k) is probably the best way to get that awesome feeling about investing.