I’ll bet there are a lot of families we serve that aren’t aware that Fourth Dimension provides retirement plan services to a number of businesses and non-profit organizations across the state. We serve as the Plan Advisor on 401(k) plans, helping to educate plan participants and ensure that employers remain compliant with 401(k) rules and regulations. In this role, I write a quarterly newsletter called ‘ADVANCE – Your Guide To 401(k) Wealth Building’ that’s distributed to the participants in the retirement plan.
I’d like to share with you an excerpt from a recent newsletter, since the subject matter applies to all investors who are yet to retire. Also, if your employer offers a 401(k) or company retirement plan, and could benefit from a higher level of support and local service, please consider making an introduction. We’d be very grateful!
Why a market decline would be REALLY good for many 401(k) investors…but not all.
When you chose to invest in your company’s 401(k), you made a really great decision, for a number of reasons. First, you’re committing to defer some gratification now for a much greater benefit later. That may sound simplistic, but a LOT of people just can’t get there. Good for you. Because your 401(k) offers a company match, you’re taking advantage of a very powerful benefit, sort of free money (you’re earning it, no doubt). You’re also practicing dollar cost averaging, the strategy of adding the same amount of money each pay period, regardless of whether the market goes up or down. You’re on autopilot.
When you step back and consider these three factors: saving for the future, receiving the benefit of the match, and dollar cost averaging; you’re putting yourself in a very wealth building-friendly posture. Because you’re in this posture, you’re setup well for any number of economic seasons. In fact, you should secretly be wishing to see your account value decline. That’s right, you should hope that the markets drop, causing you to “lose” money in your 401(k). What?!
When the market declines, your systematic investments (dollar cost averaging) will be buying you the same companies as before, but on sale now. Each share of a company that your contribution buys you will be cheaper now than before, and when the market eventually grows again, those shares have more opportunity to grow with the market. In other words, you’re hoping for a big investment sale.
While this might make logical sense, some people struggle with the notion of seeing their account value drop. Let’s revisit your company match. If you’re receiving a match on the money that you’re contributing to your retirement plan, then the market would have to decline A LOT for you to even lose enough money to impact the money that you invested. Here’s a simple example to illustrate this:
You invest 3% into the 401(k) and receive a 100% match, a match of 3%. That totals a 100% return on your savings. If the market drops, it will have to drop 50% before it’s cut through the match and affected ‘your’ investment. See how that works?
All of this should encourage you to take a long-term view of your 401(k) investing, and possibly push you to be fairly aggressive (more stocks) in your investment model.
BIG CAVEAT: If you’re near retirement, say 5 years or less, you may consider meeting with us or another advisor to put a plan together for your retirement. That plan may include a more conservative approach to investing. With less time to invest and ride-out market declines before needing the money, a more measured approach may be warranted.
While a 401(k) investor shouldn’t throw caution to the wind, a winning investment philosophy may allow you to better understand the risk and reward dynamics of long-term investing.
As always, please let us know how we can help you in your investing and financial planning.
Until next time, Advance!