O’Grady here. Here’s a question that’s come up a lot lately. And it’s a good one. Should I keep investing in my 401k during the Coronavirus outbreak? Fill in Roth IRA, IRA, or any type of account you’d like. The principle is the same.
We’re talking accounts where you have some automatic, systemic contribution going in. In a 401k that’s a contribution from your paycheck, usually every two-weeks. Maybe it’s once a month into your Roth.
The perceived problem is that you see the value of your account going down and you think…why should I keep buying things that keep going down in value. Seems logical.
I maintain that if you’re several years away from actually using this money, or in many cases, several decades away…you should rejoice that the market is down.
I’ll explain why. And by the time we’re done, you’ll be rejoicing too and maybe even increasing your contribution.
Let’s start with what my Grandpa told me. Buy low, and sell high Sonny Boy.
So if you were thinking about cashing out any investment now…probably not the time.
I’m not your financial advisor, unless I happen to be, and don’t know your situation. So don’t take personal advice from some guy on social media, because I’m not giving it. General principles here.
So if now is not the time to sell because it’s low, it must be time to buy. That’s right.
But you say, it could go lower.
It could, and then you’ll buy again next paycheck. It’s all about buying more shares at lower prices.
Let’s check the math.
The numbers are hypothetical and for illustrative purposes only. I want you to get the principle.
Let’s say you’re making contributions to an S&P 500 index fund inside your 401k. A month or so ago, when the market was hitting highs, we’ll say your index fund was selling for $10 a share. Again, just made up numbers. I want you to understand the concept.
We’ll say you were contributing $100 a paycheck. So you could buy 10 shares for a hundred dollars. Those 10-shares are yours. You own them. Whether they go up or down in value, you still have 10 shares.
Ideally, years from now when you turn them into spendable cash they’ll be higher in value.
Let’s say your next contribution is about to hit and now the shares are valued 30% less, or 7-dollars. How many shares can you buy now for that same $100. A little more than 14. (14.29.)
If I know that something is going to increase in value over the long term, I’d rather have 14 of them, than just ten.
And if they fell to 5-dollars. Well, now my hundred dollars would buy 20-shares.
Wow…I’m starting to accumulate some shares here. And when the market resumes its historical trend upward, I’ll have a lot more shares working for me.
This is why, for most folks it doesn’t pay to turn off your 401k contributions when the market pulls back.
If you have the cash flow, increasing your contributions could be a savvy play.