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With the recent market downturn, I’ve seen countless questions similar to this:

I put $1500 each month into my 401(k) and it has done well.  Lately, however, the balance has been dropping very quickly.  My friends are all stopping their contributions because they’re tired of adding money and watching it go away.  What do you think I should do?

I remember being on the playground as a young child discussing ways to avoid catastrophes like an airplane crash or a falling elevator.  The general consensus was to wait until the very last moment and then jump- rendering you immune from any sort of injury due to falling.  That logic is similar to the logic above- stopping investment or pulling out of markets now is not going to prevent further losses.  In fact, it will probably cause you to miss out on a rare opportunity to buy stocks at a discount.

One of the reasons investing is confusing is that market returns and bank account interest rates seem to be similar.  In reality, they are completely different things.  A high yield savings account earning 1% a year means that you’ll earn 1% going forward, at least until the rate changes again.  Returns of an investment account with stock and bond funds up 1% or up 10% or down 10% over the last year provide no reliable indication of what performance will look like in the future.

Saying “stocks always go up” sounds flippant and even reckless, but there is some truth to that notion.  The price of stocks over time is tied to real businesses.  In the long run, as long as GDP grows, productivity gains continue, and companies continue to earn and grow their income, it is very likely that stock market indices will continue to rise over time as well.  Positive earnings growth is like a rubber band that pulls up on stock prices over time. 

When market valuations get high, the rubber band gets slack and doesn’t pull up as hard, making market downturns more likely.  When valuations are low, the rubber band gets taut, and the stock market is more likely to rise.  Earnings don’t tend to change as quickly as stock market prices, so the most common way to see the rubber band get stretched is following stock market declines.  It’s counterintuitive, but the best time to buy into the market is almost always after steep declines in share prices when instincts tell us to run far away from risky investments.

Looking at recent performance is one of the worst ways to pick investments in a 401k, second only to basing decisions off the names of the funds!  To pick the right investments for the long run, you need a deep understanding of the choices and a plan to invest for the long haul using funds with reasonable fees, a sensible investing approach and as broadly a diversified footprint as possible.  It’s very important, as many people have most of their investment assets in company 401(k) plans and the like.  Financial advisors like Telarray, who can help guide investment selections can be invaluable in this effort.

With the recent market downturn, I’ve seen countless questions similar to this:

I put $1500 each month into my 401(k) and it has done well.  Lately, however, the balance has been dropping very quickly.  My friends are all stopping their contributions because they’re tired of adding money and watching it go away.  What do you think I should do?

I remember being on the playground as a young child discussing ways to avoid catastrophes like an airplane crash or a falling elevator.  The general consensus was to wait until the very last moment and then jump- rendering you immune from any sort of injury due to falling.  That logic is similar to the logic above- stopping investment or pulling out of markets now is not going to prevent further losses.  In fact, it will probably cause you to miss out on a rare opportunity to buy stocks at a discount.

One of the reasons investing is confusing is that market returns and bank account interest rates seem to be similar.  In reality, they are completely different things.  A high yield savings account earning 1% a year means that you’ll earn 1% going forward, at least until the rate changes again.  Returns of an investment account with stock and bond funds up 1% or up 10% or down 10% over the last year provide no reliable indication of what performance will look like in the future.

Saying “stocks always go up” sounds flippant and even reckless, but there is some truth to that notion.  The price of stocks over time is tied to real businesses.  In the long run, as long as GDP grows, productivity gains continue, and companies continue to earn and grow their income, it is very likely that stock market indices will continue to rise over time as well.  Positive earnings growth is like a rubber band that pulls up on stock prices over time. 

When market valuations get high, the rubber band gets slack and doesn’t pull up as hard, making market downturns more likely.  When valuations are low, the rubber band gets taut, and the stock market is more likely to rise.  Earnings don’t tend to change as quickly as stock market prices, so the most common way to see the rubber band get stretched is following stock market declines.  It’s counterintuitive, but the best time to buy into the market is almost always after steep declines in share prices when instincts tell us to run far away from risky investments.

Looking at recent performance is one of the worst ways to pick investments in a 401k, second only to basing decisions off the names of the funds!  To pick the right investments for the long run, you need a deep understanding of the choices and a plan to invest for the long haul using funds with reasonable fees, a sensible investing approach and as broadly a diversified footprint as possible.  It’s very important, as many people have most of their investment assets in company 401(k) plans and the like.  Financial advisors like Telarray, who can help guide investment selections can be invaluable in this effort.

Is the market going to go back up from here?  The answer is almost certainly yes — eventually—but nobody knows for sure when.  One thing that seems certain is that if you like the markets at the beginning of this year, you should like them a lot more now that they’re down 10-30% from those levels.  There’s no way of knowing if by the end of 2022 markets will be down more from here or mounting a recovery.  In our view, continuing to invest at discount prices is the best decision today, just as it has been in each market downturn we have studied.  Nobody knows the future but a true long term approach means you should be excited to put money to work at a discount!

Is the market going to go back up from here?  The answer is almost certainly yes — eventually—but nobody knows for sure when.  One thing that seems certain is that if you like the markets at the beginning of this year, you should like them a lot more now that they’re down 10-30% from those levels.  There’s no way of knowing if by the end of 2022 markets will be down more from here or mounting a recovery.  In our view, continuing to invest at discount prices is the best decision today, just as it has been in each market downturn we have studied.  Nobody knows the future but a true long term approach means you should be excited to put money to work at a discount!

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