Top Tips: The biggest mistake in a falling stock market
Reprinted from Friday July 27, 5:37 pm ET
By Gerri Willis, CNN
This past Thursday was the second worst day of the year for the Dow Jones Industrial Average. But remember, it was just a week ago today that the Dow closed above 14,000 for the first (and only) time.
What it means for 401(k) investors
Fluctuations in the market shouldn't get to the 401(k) investor. Keep in mind your time horizon - most of us are going to be invested in the market until we retire, often decades from now.
On average, stocks move higher - their long term average gain is 10.8 percent each year, according to Hugh Johnson of Johnson Illington Advisors. Over those long time horizons, stocks will move up and down. It will be nearly impossible for you to call the highs and lows. If you sell now, you run the risk of missing gains and paying fees to re-invest in the market. Here's an example of how damaging moving your money around can be:
- If you sold your stocks at the market bottom in September of 1998 when the Dow was at 7539.07, you would have missed out on portfolio gains of 21.8 percent by the end of that year.
- If you sold your stocks at the bottom of the 1987 crash in October, when the Dow was at 1738.74, you would have missed out on 24.7 percent of your portfolio gain by the end of December 1988. That's almost $25,000 missed opportunity on a portfolio with $100,000, says Johnson.
- Economists we talked to said we're in for at least one sharp sell-off a year. Put your money into the market a little at a time, consistently. That's the way to earn gains - not gambling on where prices will go next. Sit tight and let the bulls and bears ride it out.
- Selling when the market is falling is not the way to protect yourself or your assets.
Diversifying your assets is the best solution here. Go to Morningstar.com's Instant X-Ray to see exactly what is in your portfolio.
- Make sure you are adequately diversified in sectors, company sizes (by market capitalization) and regional distribution. When you're diversified, if one sector or type of company takes a downturn, your whole portfolio won't feel the hit.