When you contribute to your workplace retirement account, you are putting money into the market every couple of weeks. Investing money into the market on a set schedule is called dollar-cost averaging. During down markets, think of it as a sale. Everyone loves a good deal!
The S&P 500 will be within 5% of an all-time high, approximately 3 out of every ten days. The market will go back up eventually. The only way you lose money is if you sell when it is low. By putting money into your retirement account each month, you can take advantage because it will go back up.
Keep Investing
If the market drops by 30%, and you are just starting, you will barely notice a difference in your account balance. For somebody who has $10,000 in the account, it will be down $3,000. That is stressful; however, if you keep adding to the account, your portfolio will be back much sooner than if you stop investing because of concerns in the market. Typically when we have a bear market (a drop of 20% or more), the market will see a higher than average return rate, boosting your portfolio value faster than usual.
In the following example, the market drops close to 30%. Frank was contributing; he got nervous and decided he didn’t want to take the chance of losing money. He chose not to contribute anymore. (At least he didn’t sell) Billy continued to invest, he realized it would be better if he continued to put money into the market, buying the discounted stock.
In the example, the market has close to a 30% decrease in 5 months. Frank’s account gets down to $7,018. Since Billy was contributing each month, his lowest account value was $8,256. As you can see, 2 years after the market drop, Frank’s account still did not recover. After adding Billy’s contributions for the two years, $7,488, and the $10,000 initial balance, he has invested $17,488 into the portfolio. However, it is now worth $18,444.68. Billy has made almost $1,000 in profit, and the market still is not back to where it was two years ago. It should continue going up because remember, three out of every ten days, the market is near the all-time high.
This example isn’t perfect; 24% is a high return. However, I would expect it to be above average after a large drop in the market.
Where did I get the $312 a month? With the employer match, it is only 3% of your pay.
Step 1: How much is 3%
Let’s continue to look down the graph and see how long it takes Frank to get back to $10,000.
WOW! It took Frank three years and five months to break even. In that 3 years and five months Billy has managed to increase his account to $27,864. A profit of $5,278 after subtracting the $12,792 in contributions and the original $10,000.
The market is much more volatile than in my example. However, when you dollar cost average, the down months are actually kind of exciting. March and April this year provided a 25% discount. Until you take money from your investment accounts, view these market decreases as an opportunity instead of worrying about what will happen next. When you are in it for the long term, it will go up.
If you are worried, please watch the video from the amazing J.L. Collins:
Additional Reading:
See how you can turn your 3% into $1,000,000. It just takes time and small increases.