February 9, 2010

From early 2008 to March 2009 the S&P 500 lost more than half its value, a noticeable amount to say the least. As the house of cards began to fall people understandably began to become nervous. Many stopped contributing to their 401(k). Their thought was 'Isn't dumping money into a falling market like throwing money down the drain?". My answer: yes and no. If the market falls to zero and never comes back then yes, you have thrown your money down the drain. If you believe that most companies and the US economy as a whole will survive despite the turmoil, the answer is no. In fact by continuing to contribute to your plan in a falling market you are actually helping the money you have already invested by bringing down your average cost per share.

For example, Joe Employee had $1,000 in his 401(k), invested in the S&P 500 index at the end of January 2008. The market had begun to fall from its October highs and Joe was nervous it could get worse. He suspended all future contributions to his 401(k) plan. As of January 31st of this year he would have $817 in his 401(k). The market went through a rough patch (to say the least) and Joe had gotten out relatively early. But did he really help himself out? What if he had continued to contribute despite the falling market, say $250 per month? As of January 31st of this year Joe would have $7,178 in his 401(k) - $7,000 that he had invested and $178 in earnings - during one of the worst market runs ever. Not to mention tax savings and a potential employer match that may have been missed! Turns out it wasn't such a bad idea to keep contributing- during one of the worst market runs ever.

Steve Hicks

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).