The 7 Biggest 401(k) Mistakes – #5 Stopping Contributions or Cashing Out During a Market Correction

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401k Tips for Business Owners and InvestorsDuring the 2008 Credit Crisis the S&P 500 dropped a whopping 37%, taking your 401(k) balance with it. 

Panic was a perfectly understandable reaction. Fear and greed are the two most powerful emotions in investing. Fear being the most powerful of the two in my opinion.

If you resisted the flight response and consistently participated in your plan from 2003 through 2008 you had an average annual return of 7.2 percent, even including the losses from 2008, according to the Employee Benefit Research Institute.

So let’s discuss market corrections further, which are inevitable and a part of investing. A look back at stock market history shows that the frequency, length and intensity of a correction can vary widely. You may be thinking that they are all intense!

According to Capital Management Research, since 1900 here are some numbers:

  • 5% Correction happens 3 times per year and averages 47 days
  • 10% Correction happens 1 time per year and averages 115 days
  • 15% Correction happens 1 time every 2 years and averages 216 days
  • 20% Correction happens 1 time every 3.5 years and averages 338 days

What are the lessons you can learn from a market correction?

No one can predict when a correction will happen. Don’t try to predict or use gut feelings to determine when the next correction will take place. Get yourself an all-weather portfolio that can handle the inevitable storms that the markets will throw your way.

No one knows how long they will last. Most of the market correction are relatively short in duration. Most lasting less than a year. The key is to stay focused on your goals and not worry about how long it will last. View it as a golden opportunity to buy low and get a great deal!

No one can consistently predict the right time to get in or out of the market. Just as it is hard to know when to get out of the market, it is equally, if not harder to predict the right time to get back into the market. You should remain invested. If you are investing for retirement many years away, there is no point in trying to time entrances and exits. What if you are wrong and miss some potential gains in the recovery?

In my FREE ebook The 7 Biggest 401(k) Mistakes I share my 6 Tips for Coping With Market Declines. All you have to do is download my FREE ebook, The 7 Biggest 401(k) Mistakes today!