As it happens each year, I am constantly amazed at how fast time flies. No doubt it has been a volatile year in many different areas. Between the stock market, politics, and the economy, it can be difficult to find the positives. I hope you all can take some time to find the positive in your year.
I wanted to take some time here to review a bit of what has happened this year, and why it is important to retain a long-term perspective when it comes to your 401(k) investments. We reached new market highs in early January bringing the culmination of a decade long bull market to fruition. What has followed is a market decline that reached bear market territory, or a 20% decline, in mid-June. Simultaneously, the end of the 2nd quarter economic data showed two consecutive quarters of negative GDP growth, signaling the beginning of a recession. While there has been debate about whether we are in a recession, it is undeniable that 2022 has been a challenging year.
Thankfully, we have seen both recessions and bear markets prior to 2022. We know that neither of these events are permanent. Presently, that knowledge does not make the current conditions any less painful. However, remember that we have discussed the importance of staying long-term with retirement planning. Historically, bear markets have averaged 11.3 months. Meanwhile recessions have averaged around 17 months in the United States. You will notice that bear market conditions have a shorter shelf life than recessionary economic conditions. This is in part because the stock market can serve as a leading indicator for what both investors and companies expect in the future. Thus, we can expect the market to recover before the economy fully recovers. Obviously, this is based on historical data and our expectations.
So, how does this impact your 401(k)? Depending on your risk tolerance, which we have previously discussed, market returns can have a positive or negative impact on your overall account balance. Your account balance will move with the market based on your choices. I want to focus here on keeping a long-term perspective. Based on the average length of a bear market, we are in month 6 of 11. We have a few months left before we reach the average, and even then, it could last longer. Keeping your perspective long term is important because the market will recover, we know this based on historical data. It is human to want to panic and make moves in your portfolio, but rash decisions rarely work with investments. Remember to speak with your Advisor prior to making any changes in your portfolio, especially in a time like this when the market is down. One of the biggest mistakes I see investors make is rushing to make a change in their portfolio when it is already too late. You advisor works for you and is available to you at any time, especially during market downturns. Do not hesitate to call him or her.
Furthermore, as you make contributions to your 401(k) or other qualified plans, you do so every pay period. As a result, money is going into your account regardless of market behavior. When the market is down, as it is this year, you are essentially buying your investments “on sale.” You will reap the reward for that when the market recovers, and gradually moves north by northeast over the years.
If you take anything away from this article, I hope that it is to speak with your advisor before making any portfolio changes during a down market. He or she may very well determine that the move makes sense for you. More importantly, you will sleep better at night knowing you made an informed choice. As I mentioned earlier, rash investment decisions rarely work in your favor. Take your time and think about your long-term goals prior to making any decisions.
Article Written By Vance Wentz
VANCE WENTZ is an advisor with TFB, Inc. Vance graduated from Kansas State University with a degree in finance. The North American Dealers Association endorses Tax Favored Benefits as a 401(k) provider. No compensation is received. More information is available at www.taxfavoredbenefits.com.