Keep funding your 401(k)
The temptation to time the market during a downturn is so strong that some investors stop contributing to their 401(k) plans in hopes of avoiding losses during the turmoil. But a decision to stop funding your 401(k), even temporarily, can prove to be a costly mistake that may derail plans for a fulfilling retirement.In light of the elimination of many company pension plans and doubts surrounding the stability of the Social Security system, the 401(k) plan is the most significant retirement savings vehicle for many workers. But to fully leverage its power, it is important to stay the course and continue to contribute — in good times and bad.One variable frequently overlooked by investors who stop contributing to their 401(k) during a downturn is the money that will be lost in matching contributions that are paid by many companies. When you stop contributing to your plan, you lose this donation, which in some cases can be as much as a dollar for every 50 cents you invest — an immediate 100 percent return on your investment.By continuing to contribute toward your 401(k) plan during a downturn, you will also be able to take advantage of attractive market prices. Because 401(k) investments are deducted from your paycheck at regular intervals, the vehicle enables you to use the principles of dollar-cost averaging. During periods of extended market volatility, there is often an opportunity to invest when prices are low. Therefore, by sitting tight and maintaining your 401(k) contributions, theres a good chance you might pick up some bargains for your plans portfolio. Of course, a periodic investment plan such as dollar-cost averaging does not assure a profit or protect against a loss in declining markets.If youre not happy with your recent 401(k) performance, it may be time to take a closer look at your plans asset allocation. Most companies that offer 401(k) plans provide employees with a wide range of investment options, but many employees fail to take advantage of this selection and concentrate the bulk of their accounts in just one or two of the choices available.Diversification is the key to long-term 401(k) investment returns. By allocating your assets into different asset classes, including stocks, bonds, and in some cases international investments, you can often offset declines that may occur in any one sector of the market. To determine which allocation mix is best suited to your financial objectives, its important to consider risk tolerance and proximity to retirement. Typically, as workers get closer to retirement, a more conservative allocation strategy is favored in an attempt to shield the savings from sudden market drops. But there are many factors that could influence your decision. For assistance with asset allocation, you should talk with a contact aprofessional financial advisor. Of course, asset allocation and diversification cannot eliminate the risk of fluctuating prices and uncertain returns.When reviewing your 401(k) allocation, make sure your portfolio is not too heavily weighted in company stock. Because some companies match employee contributions with company stock, plans can become too concentrated in a single holding. And however optimistic you may be about the future of your company, loading up your 401(k) with its stock could prove very costly should its share price dive. Therefore, if your company matches your contribution with its stock, its a good idea to carefully monitor this holding and regularly balance it with other investments.Contributing to a 401(k) during a volatile market can try the patience of even the most experienced investors. But by trying to time the market, you could miss out on significant gains. By staying the course and continuing to fund your plan, you can position yourself to reap the rewards of any future rebound in the market.Please consult your CPA or attorney on such matters.Fraser M. Horn and Dudley M, Irwin of 1st & Main Investments are Investment Adviser Representatives with Berthel Fisher in Edwards. 1st & Main Investments is independent of BFCFS.