A bear market will increase your 401(k) if you are still contributing to it. When referencing a 401(k), I am referring to all retirement accounts. I know it may be hard to believe because the Dow Jones Industrial Average is over 25,000, the S&P 500 is over 2,700 and the NASDAQ Composite is above 7,000. Since the market low of March 9, 2009 to the record high on January 12, 2018 the value of most people’s 401(k) accounts have gone up and up and up! The S&P 500 increased 312% during that period. If you are still consistently investing in your 401(k), let me tell you why a bear market will increase your Net Worth.
First, a bear market is generally considered to be a 20% or more downturn in the stock market over at least a two month period of time. Wow! That is a big drop in the value of your 401(k). For example, if you invested in a fund that mirrors the S&P 500, the change in value of your 401k would be as follows:
- $120,000 (value of your 401k that is invested in a S&P 500 fund)
- -$24,000 (the value lost if the market drops 20%)
- $96,000 (the new value of your 401(k))
You may be thinking, how could a bear market be good for my 401(k)? First, Macrotrends-90 year interactive S&P 500 historical chart provides you with a visual of how the market can fluctuate but continue to climb.
If you consistently invest in your 401(k) when a Bear Market begins, the value of your 401(k) will drop, in turn you will start to buy more shares at a lower cost. Here is a simple example of an investment of $1,000 per month into your retirement account:
- $1,000 (the amount invested per month)
- / $100 (the price per share)
- =10 shares (the number of shares you bought)
- x 10 months (the length of a bear market)
- =100 shares (total shares bought over 10 months)
- x $100 (the price per share)
- =$10,000 (total value of your 401(k) after 10 months)
Let’s see what happens to your $1,000 monthly investment when you are in a Bear Market with a 20% drop in value:
***To keep the math simple, the example below uses a consistent 20% drop in value.
- $1,000 (the amount invested per month)
- / $80 (a 20% decrease in the price per share)
- =12.5 shares (the number of shares you bought)
- x 10 months (the length of a bear market)
- =125 shares (total shares bought over 10 months)
- x $100 (the price per share when the market returns)
- =$12,500 (total value of your 401(k) after 10 months)
Based on the simple example above, by consistently investing in your 401(k), over the length of a 10 month bear market, the following occurred:
- $2,500 increase in value
- 25 more shares earned at a lower share price
Also, keep in mind that if you receive dividends that are reinvested, you will acquire more shares three times over a 10 month bear market. Therefore, do not panic when the market downturns. Instead stick to your long-term retirement investment plan and embrace a Bear Market as a chance to increase your Net Worth.
During the great recession from 2007-2009, even though the labor force shed millions of jobs, my wife and I were fortunate to keep ours. That meant we could continue our long-term investment strategy, including systematically investing into our retirement accounts. Also at that time, the S&P 500 dropped approximately 50% of its value and hit a low of 676.53. However, on January 12, 2018 the S&P 500 was 2,786.24. Over this 10 year period, we bought shares every month as the market spiraled down and continued to buy as it rose back up. Actually, as our salaries increased, we started contributing more money toward our 401(k)s and our other investment opportunities.
To read more about my personal financial history visit my About Me page. Since I am in my early 40s, when, not if, the next Bear Market begins I will be excited to ride the market down and back up and come out with more money and more shares. When the market downturns, fear and pessimism set in and jobs are lost. When this happens, managing personal finances can be stressful. However, if you prepare now and follow my Net Worth Millionaire Plan, you will be able to handle the personal financial stresses better when the market drops.
Are you ready for a Bear Market? My Bear Market recommendations are as follows:
RECOMMENDATIONS FOR A BEAR MARKET
- Confirm and maintain your long-term investment plan
- Do not panic
- Do not try and time the market
- Be diversified
- Continue to invest in your 401(k) or other retirement accounts
- Always reinvest your dividends
- Be super excited when the market value returns
Ultimately, the market should return to where it was prior to its downturn. If you consistently invested in your 401(k), you will have more money/shares than you did before in your accounts . You will also have the opportunity to increase it even more when the market climbs higher. Take the proper steps to ensure your financial success now and start today with my 10 Step Net Worth Millionaire Plan.
