The stock market's meltdown may have taken a hit to your retirement savings, but fleeing the market now is one of the last things you should do.
Thursday's sell-off, Wall Street's single worst day of the year, may have you thinking it's best to pull out of stocks and wait it out in safer investments like bonds, money market funds or even cash. But financial advisers say not so fast: Staying the course is a much smarter move.
Yes, investing in the stock market is inherently volatile, but it's also the best way for retirement savers to build up nest eggs large enough to last decades. From the European debt crisis to changing Fed policy, there are always going to be events that send stocks plunging, but reacting to those headlines is the wrong long-term strategy, said Stuart Ritter, a financial planner and vice president at T. Rowe Price Investment Services.
After all, retirement savings are built up over decades of investing and daily market fluctuations (even those as drastic as Thursday's plunge) will ultimately be overshadowed by long-term market gains. So even though the Dow Jones Industrial Average shed nearly 4% in the last two days, it still remains up nearly 13% year to date. The S&P 500 and Nasdaq are also up more than 10% from last year.
"The action that may feel emotionally comforting is often the one that sabotages your financial goals in the long term," Ritter said. "We've had situations like this one before. The people who prospered through the 2008 downturn are the people who did not react to the daily gyrations of the market."
Indeed, a recent study by Fidelity Investments found that 401(k) investors who continually invested over the last 10 years saw their average account balances grow by an average annual increase of nearly 17% from $46,000 in 2003 to more than $200,000 in the first quarter of this year. While helped by added contributions, the balances were also boosted by the stock market rebound, said John Sweeney, executive vice president of retirement and investing strategies for Fidelity.
In addition, many retirement accounts are invested in a mix of assets based on your age, which means that the effects on your portfolio may look different from the headlines.
Either way, pulling out of the market now will hurt, rather than help, your retirement savings since you will be selling your investments at a low.
"You've already experienced today's downturn. Getting out now doesn't change it," Ritter said. "If you lock in the losses, you're making it permanent. "