After two years of stellar stock market returns, the stock market through the first part of 2022 has gone down, down, down. That can feel scary when you look at your 401(k) balance. But this could just be the boost your 401(k) account needs for a bigger nest egg down the road. Yes, down markets can help long-term investors.
When you have 5, 10, 20+ years until you retire, you have a good amount of time to get through most if not all downturns. Staying with your investing plan instead of making a knee jerk reaction can play to your advantage.
There are reasons famous investors like Warren Buffett buy more stock in down markets than up. In fact, Berkshire Hathaway invested the most in stocks in Q1 2022 since 2008 in the Great Recession. A substantial market drop can enable buying low so you sell at a higher price point later.
401(k)s Enable Dollar-Cost Averaging Which Can Be Powerful
As a 401(k) investor, it can be more straightforward to see an example of how down markets can work to your benefit. Each payroll, you are likely investing some of your salary in a mix of stock and bond funds. When the market is up, you are buying fewer shares. When the market is down, you are buying more shares. When the markets recover, and not necessarily back to the former heights, you have a positive return! See the example below to see how the math works:
The Upside of Dollar Cost Averaging
| Period | Amount Contributed | Fund Share Price | Shares Purchased |
|---|---|---|---|
| 1 (market high) | $500 | $100 | 5 |
| 2 (market low) | $500 | $50 | 10 |
| 3 (recovering market) | $500 | $75 | 6.67 |
| Totals | $1,500 | $75 average | 21.67 |
| Value | $1,625.25 | 21.67 shares x $75 |
In this example, despite the market being off the high, by sticking with your investing plan, your account value is currently 8.35% better off!
There are no guarantees in the markets, and markets are volatile. Just know that when markets are down you are buying more at a lower price. As companies and economies improve, values tend to go up and that can mean better returns for you. For more information on what to think about in down markets, give this a read (Do I Adjust My 401k When Markets Are Down?).