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Holding off on contributions
We add to our 401(k), but every month we immediately lose it. Should we wait until things improve?
March 27, 2003: 11:21 AM EST
By Walter Updegrave, Money Magazine

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NEW YORK (CNN/Money) - My husband and I, both 31, are still putting money in a diverse group of 401(k) funds. Each month, though, we immediately lose the money we're putting in as the market continues to struggle. Would we be better off suspending our monthly contributions until things have improved?

-- Jody, Milton, Mass.

It's an appealing concept, all right, staying out of the market while stock prices are falling and then jumping back in when prices start to rise. After all, nobody likes to see the money they invest each month decline rather than climb in value.

But like most strategies that effectively require you to outsmart your fellow investors, it's much easier to dream about than to pull off.

Timing the market is problematic

The problem with such market timing strategies is that you have two decisions. The first is when to get out. Judging by your question, you've already missed the boat on that one, although you're hardly alone. Very few investors sold out of their tech or large-cap growth stocks or funds back in early 2000 before the market hit the fan, so to speak.

If, like most of us, you stayed in the market at the end of the last bull run because you didn't see the downturn coming, then I think you have to ask yourself whether you'd be any more likely to know when to jump in on the rebound.

In fact, timing recoveries is just as hard. Recoveries don't happen in a straight line, and there are lots of rallies that may appear to be a rebound but turn out just to be false starts.

Recoveries are never simple

For example, over the six months from late September 2001 to late March 2002, the Dow climbed from 8,236 to 10,635, a gain of 29 percent, and appeared to be making its way back to its high of 11,723 of Jan. 14, 2000. Things sure had improved, so I suppose someone could easily have concluded that then was a good time to get back in the market.

There have been several brief rallies that looked inviting at the time, but later reversed themselves. Traders call these "suckers' rallies" because they fool people eager for evidence that a recovery is underway back into the market, only to disappoint them.

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I think it's futile to play a guessing game with the market. You can't eliminate market risk if you want to reap the long-term advantages of market gains. But you can mitigate that risk. And the right way to do that isn't to try jumping in and out of stocks, but to have a diversified portfolio, which you may already have.

If you want to change some categories, or check to see if you're really as diversified as you think you are, you can find tips on diversifying your portfolio by clicking here.

I'll leave you with one other thought. I know that you see the 401(k) contributions you've been making since the market downturn as lousy investments because they've been losing money. And over the short-term you probably are sitting on losses on those contributions.

But I urge you to extend your vision a bit farther. Despite all the economic and geopolitical uncertainty present today, this economy and this market will eventually recover. And when it does I believe the shares that you buy today -- even those you bought and are now nursing losses in -- will look like good buys five to ten years from now.

So I recommend that you continue making your 401(k) contributions in a way that maintains your diversity. There are no guarantees that doing so will make you better off, of course. But in the long run, this kind of disciplined strategy has a much better shot at paying off than playing a guessing game of when to get in or out of the market.


Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He can be seen regularly Monday mornings at 7:40 am on CNNfn.  Top of page




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