After some great years of market returns, this year stocks and bonds are trading in bear market territory. Bear markets are generally defined as a drop of 20% from market highs.
Many people think they have lost money in their 401(k) when markets drop. Actually, a drop in the markets can be a good thing for those of us retiring in 10 or more years. Why is that you say?
A big goal of investing is buying more shares low and selling later when markets are on the rise. That gives us a bigger bang for our buck. Your 401(k) enables you to regularly invest with each paycheck. When markets are up, you are buying less shares. When they drop, you buy more shares. This is known as dollar-cost averaging. As markets rise down the road, you get a better return and this can make for a bigger nest egg come retirement.
In fact, some investors up their 401(k) contributions after big market drops. We believe in steady, consistent approach, but you can see why some do this. Do know that no one knows when markets will hit bottom or peak. That's why we believe in setting your strategy and sticking with it in good and bad times.
Other Market Insights to Keep in Mind
In economics, markets are considered a recession leading indicator. In other words, they let us know a recession could be on the horizon when they hit bear market territory. They will also lead us out meaning that markets tend to rise before a recession has officially ended.
While investing returns cannot be guaranteed, history may provide some insights of how things even out over time. Since 1926, there have been 15 recessions in the United States and 15 recoveries.^ In addition, large cap stocks have returned more than 10% per year on average and long-term bonds greater than 5%.
For more information on if changes to your 401(k) might make sense, give this a read: Do I Adjust My 401(k) When Markets Are Down?
For more information on historical market returns and other insights, this one is helpful: How to Think About Investing When Markets Fall Quickly.
We hope this helps you rest easier at night and gives you ideas on what makes sense for your retirement savings strategy.
^US Business Cycle Expansions and Contractions information available at http://www.nber.org/cycles.html