Why young investors should "Stay the Course" and continue to invest
With the recent upheaval in the financial markets, many individual investors are feeling the pain of shrinking investment accounts. In fact, retirement accounts have lost over $2 trillion dollars in value in the past 15 months. One of my friends says that it seems that every bit of money he contributes into his 401k is gone by the next statement. I understand how he feels, but I believe that young investors should try not to panic in these turbulent times and "stay the course" with their investments.
Right now, no matter what you have invested in in the past few years probably lost value, but if you have an investment plan where you regularly contribute money you would be buying in at a low point right now. It is true that the market could fall further, but your regular investments would buy at those lower points, too. This is basically dollar cost averaging and it is a strategy that has been shown to work even during The Great Depression . If you believe that the stock market would recover some day then buying in at a low point is a good thing.
Another point is that noone knows when we will hit bottom and market recoveries happen just as fast as market crashes. If young investors like me are too spooked to put in any money now or just hold too much cash for a long time then we might miss the recovery and receive returns below the market. Cash is a safe bet, but it is eroded by inflation so holding a disproportionate amount of cash is not the most profitable investment in the long term.
Also, what many people are doing now is to cash out their stock holdings in fear of further drops. I think this makes sense if the cash is needed for immediate use and if you believe the investments you bought will become worthless. However, if you are a long term investor with a balanced portfolio of stock mutual funds then there may not be much to worry about. It has been shown that individual investors in mutual funds tend to have less returns than that of the funds they invest in because they tend to pull out their investments at low points and buy in later at a higher point as an emotional response. So if there is no need for the money and you believe that in the long term stocks will recover then it may be best to leave it alone even though it is stressful to see your nest egg shrink.
In addition to staying the course and continuing to invest, this could be a great time to diversify your investments since nearly every asset class has fallen in value. If you are heavy in stocks then you could look into some real estate, commodities, or bonds. The goal is to have a well balanced portfolio that you understand, and eventually the current bear market would seem like just a bump in the road.
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