It is no secret that the stock market has experienced its worst decade since the Great Depression. Many investors watched their retirement funds fall more than 30%. Investors found it difficult to stay invested while the markets continued to drop, much less stay the course and continue investing. However, for those who had the patience to ride out the storm, the last decade also provided the time to recover from the downturn.
According to the Jan. 2, 2011 article, “Slow and Steady Saving Still Pays,” in The Wall Street Journal, consider the 401(k) investors who diligently put away money, taking advantage of the matching contributions provided by their employers. For example, an employee making $40,000 a year begins contributing to her 401(k) plan in 2000. She contributes 6% of her salary, or $200 a month, and her employer matches 3%, bringing her total monthly savings $300. The money is invested in the Vanguard 500 Index mutual fund that tracks the Standard & Poor’s 500 Index.
Let’s assume as the employee earns a 3% raise per year, her contributions to the 401(k) plan rise accordingly, meaning the second year she contributes $206 and her employer matches with $103. Unfortunately, just as our investor started contributing in 2000, the markets entered a bear market that lasted about three years.
By March 2001, our investor and employer would have contributed $4,527, but because of market performance, she only had $3,833 in her account, which is more than a 15% loss. Now sticking with the program, our investor saw her retirement funds rebound by 2007. In June, our same investor would have $40,736 in her account, while only contributing $19,899. Her employer contributed nearly $10,000, but returns on the investment were around 37%, according to the article.
Then came the financial crisis and the ensuing Great Recession. By the end of February 2009, our investor’s 401(k) account was down to $25,449, a loss of nearly 32%.
Once again, staying the course and continuing to invest pays off as the market rebounded. At the end of November 2010, the account balance was almost $52,000, with $30,470 coming from the investor’s contributions and the rest employer match and a 14% gain in the S&P fund from January 2000.
This example proves how dollar cost averaging into the market, and investing for the long term can be beneficial in volatile markets. Emotional investing often leads investors to make the wrong decisions at the wrong time. When they react to a rapidly declining market, they end up selling during the lows and buying during the highs. By continuously dollar cost averaging into the market, an investor buys more shares when the price is low, fewer when the price is high. Market downturns become a “sale” environment.
Timing the market is difficult as it requires an investor to be right twice: when to buy and when to sell. Looking back at 2010 alone, if an investor missed the three best days in the market, his return would be 3.4% versus the 13% the S&P 500 returned for the year.
For relatively young investors who have been active in the stock market for the last 10 to 20 years, they have experienced the second best bull market ever and the worst decade since the Depression.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
