Focusing on the long term with your 401(k) is often the smartest move.
It’s easy to set things on autopilot with your ForUsAll 401(k). Enrollment is easy, and you even get help from Dave, our virtual advisor. Dave will help you set up your account, show you how to make regular contributions, and explain your investment options.
Even if 401(k)s are new to you, don’t let the prospect of investing your contributions scare you. Not sure which funds to choose? No problem. Your ForUsAll 401(k) offers something called a target-date fund. This is a type of fund designed to keep you on track for retirement.
A target-date fund holds a mix of stock and bond funds in an allocation suitable for someone your age. If you are young with retirement decades away, the fund will weight stock funds heavier than bond funds. As you get older, and closer to retirement, the fund pares back the stock fund allocation and increases the allocation to bond funds.
These changes in your target-date fund happen automatically. All you need to do is pay attention to how much you are contributing to your 401(k) each year. If your company offers a “match” – where it also contributes to your 401(k) – try to contribute at least enough to qualify for the match. It’s free money.
Otherwise, sit back and relax.
All this sounds easy. And it is. But here's the thing. Sometimes it's hard for humans to do nothing. This can be especially difficult when it comes to investing. And it’s even harder when the value of our 401(k) has taken a dip. And the bigger the decline, for many of us, the stronger urge to do something. Often that something is to sell. Or to stop contributing to the 401(k).
When you contribute to your ForUsAll 401(k), you’ll most likely be investing in some combination of stocks, bonds, and short-term money market instruments. Of those three asset classes, stocks have historically outperformed the other two over long periods. But over shorter periods, stocks (and the funds that invest in them) can fall behind those other asset classes and even lose value.
When a sagging stock market is dragging down the value of your 401(k), it’s tempting to sell out to cut your losses, perhaps hoping to get back in the market at lower prices.
But there are some pretty good reasons to do nothing instead.
History. The stock market can dive now and then, but it does pretty well when you give it a couple of decades to do its thing. In fact, there is not a single 20-year period in the last 100 years where the stock market (as defined as the S&P 500) turned in a negative return. (Assuming reinvestment of dividends.) There is not even a 20-year period where stocks failed to outpace inflation.
So given the history of the stock market, if your retirement date is decades away, history suggests that you'll do just fine by staying invested in stock funds (or your target-date fund that includes stock market exposure).
You are a regular investor. You are not making just one investment in your 401(k). Every pay period you are investing new money. So when the stock market dips, you are adding to your stock market exposure at those lower prices. And when the market recovers, you benefit from making those savvy investments near the market’s lows.
This continuous investing also helps to smooth the ups and downs of your 401(k) portfolio. And a less volatile portfolio is less likely to grab your attention and say, “Do something!”
Humans are not good at timing the stock market. We may think we can exit the stock market near a peak and get back in at the next low. But numerous studies have shown that humans are not adept at that sort of thing. One reason is the stock market often generates much of its returns over just a few days—this can be true even over multi-year periods. If your 401(k) has no exposure to the stock market during those short periods, your retirement nest egg misses an opportunity to grow larger.
The investment site Morningstar.com even has an annual feature explaining how market timing and switching between funds costs the average investor. It’s just very hard for humans to resist moving in and out of funds to juice returns. And that’s why Morningstar.com has a ready-made story each year!
Sit back and relax. Think about boosting your contributions over time. If your plan has a match, try to contribute at least up to the company match. But try not to spend too much time thinking about the markets. Because doing nothing can really do something for your 401(k) over several years.
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