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Stocks have had a strong five-year run, up more than 26% in 2013 alone. That was despite a government shutdown, the threat of U.S. default on its debts, and a less-than-stellar year for corporate earnings.
The question now is if we can expect more of the same or if we should prepare for a significant stock market slide. It should be no surprise that stock market experts claim we can expect both. Some of the most optimistic predictions say you can anticipate returns of 8–12% this year. Others urge investors to prepare for a market plunge of as much as 50% in 2014—or maybe 2015.
What's an Investor to Do?
Fortunately, you don’t have to worry about what the market did last year, or what it will do in the coming years. After all, you have zero control over market performance.
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All you really have to worry about is you. Do you have a long-term retirement investing plan in place? Are you following the plan? Will you stick to it even if the market does drop 50% this year?
Your answers to these questions have much more impact on whether your retirement plan is successful, and the good news is they are all under your control!
A Proven Strategy
So how can a plan that ignores market swings and focuses on your actions lead to solid retirement savings? The answer is dollar-cost averaging—that’s what investors call it when you invest the same amount of money at regular intervals throughout the year. You use dollar-cost averaging when you invest a certain percentage of your paycheck in your 401(k) each pay period, for example.
Dollar-cost averaging works because you buy more mutual fund shares when prices drop and fewer shares when prices rise. As a result, your 401(k) or Roth IRA balance can recover faster after a market slide.
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A study conducted right after the 2008–09 stock market decline proves this idea. Workers who continued making regular contributions to their 401(k)s had a 65% increase in their 401(k) balances just two years later. Those who stopped contributing during the downturn saw just a 26% increase.
This is the reason Dave recommends a dollar-cost averaging strategy when you reach Baby Step 4 and start investing 15% of your income for retirement. It’s also why the investing industry as a whole tends to embrace dollar-cost averaging—it just works!
Of course, if you’re going to go this route, you need to choose excellent growth stock mutual funds for your 401(k) and Roth IRA. You’re looking for funds with a strong history of above-average returns—funds that made comebacks after the stock market went haywire.
Get Started on Your Plan Today
An investing professional who’s been through tough stock markets can help you with your mutual fund choices and set up your Roth IRA if you don’t already have one. You can find an experienced, trustworthy advisor who has earned Dave’s recommendation through his Endorsed Local Provider (ELP) network. Your ELP will give you the advice you need to get your plan started and keep it on track. Find your ELP today!