Sticking With Down Market Pays Off for Retirement Savers

Investing, Investing Strategy, Retirement Planning
Sticking With Down Market Pays Off for Retirement Savers

In January, the Royal Bank of Scotland made a bold move, widely covered by the U.S. media. “Sell everything,” it said, in response to what it predicted would be a “cataclysmic year” for the financial markets.

Here’s what actually happened: January and February were not good, though cataclysmic feels like a strong word. But by the end of March, both the S&P 500 and the Dow Jones Industrial Average had erased their losses.

And then there’s what matters most to you: your own retirement balances, of course. We told you not to panic, that long-term investors would be able to shake off January’s market volatility.

History shows that’s sound advice, and it’s been borne out once again. According to data just released by Fidelity, while average 401(k) balances dipped slightly in the first quarter of 2016, long-term savers saw their account balances increase. Those long-term savers, defined as people who have been in their 401(k)s for 10 years, saw accounts go up 2% year-over-year, to an average balance of $240,700.

Sticking it out for the long haul is key

Two things will get you to a comfortable retirement: putting money away, and investing it in a diversified portfolio that takes a reasonable amount of risk.

A rocky market is dangerous because, historically, it has tempted investors away from both goals. People decide they no longer want to play this game — or even that other things, like a designer handbag, might be a better investment — and pull their money out. Or they shift too much into less volatile but lightweight investments like bonds, or stop contributions to retirement accounts.

Fidelity’s data suggest, however, that we might be learning from past mistakes. Michael Shamrell, a company spokesman, said that despite customer contacts with the firm being up 30% in the first quarter over the same time in 2015 — which indicates some level of concern among investors — 41% of new 401(k) dollars went into equity funds, down only slightly from 44% in the first quarter of 2015.

Very few participants stopped making contributions because of the downturn, he said, and the percentage of customers who made a trade — an indication of investors changing allocations or selling investments — was actually down from the first quarter of last year. In fact, the total savings rate in 401(k) plans reached a record high 12.7%, with a record 13.6% of 401(k) investors increasing their contribution percentage.

Dollar-cost averaging can control emotions

Fidelity’s data indicate that many investors are using a practice called dollar-cost averaging, a fancy term that basically means staying the course. When you dollar-cost average, you invest set amounts of money at regular intervals, no matter what’s going on with the market as a whole. If you participate in a 401(k) or make regular automatic contributions to a robo-advisor, you already do this, though you may not have realized there’s a name for it.

It’s a strategy that pays off, and not only because by nature it allows you to buy more shares when prices are low and fewer when prices are high. It also helps prevent you from tinkering. And when it comes to investing, tinkering — or worse, fleeing completely — is generally not a good thing, particularly when done in response to market fluctuations.

Data from J.P. Morgan drive home the drastic impact of missing the best days in the market because you were spooked by the worst days. A $10,000 investment left fully invested in the market from January 1996 through December 2015 weathered the worst days and benefited from the best; it earned an 8.18% return and ended at $48,230.

As J.P. Morgan points out, six of the 10 best days in those years occurred within two weeks of the 10 worst days. That $10,000, if it missed out on those 10 best days, would have a return of only 4.49%, ending at $24,070.

The lesson: When it comes to investing, just staying in the game often makes you a winner.

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Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.