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Julie Jason: Investment knowledge is key when facing a falling market

By Julie Jason

King Features Syndicate

First Published May 24 2014 01:01 am • Last Updated May 24 2014 01:01 am

Even though the stock market just hit a new high last week, some are still concerned about buying stocks — the memory of the financial crisis is just too fresh.

Let’s explore what a retirement-plan participant experienced then, carried forward to today.

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Suppose you just started a new job after graduating from college in the summer of 2007, as the financial crisis was starting to affect the stock market. You began participating in a retirement plan at work in the fall with a $100 monthly investment in the stock market through an S&P 500 Index fund offered by your plan.

By the end of March 2009, the market bottom, you would have contributed $1,900. Your value would have been $600 less — only $1,300, reflective of the severe market decline suffered during the crisis.

For some, that would have been enough to stop participating in their retirement plans altogether. Many learned to distrust the market, wondering why they even bothered to try to save.

But, the truth of the matter is that investors had choices. What they did next determined success or failure.

If you bailed out and put your $1,300 in the bank, how would you have made out? From March of 2009 through April of 2014, you would have been about even, since interest rates were almost nonexistent.

What if you stopped your monthly contributions, but held on to your S&P 500 Index fund?

By the end of April 2014, you would have had about $3,200 after contributing your original $1,900, for an average annual return of 9.2 percent.

You could have done even better by continuing your $100 monthly investments after March 2009.

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By April 30, 2014, your monthly contributions would have totaled $8,000, and your balance would have been about $13,000, for an annual return of 14.6 percent. If instead, you had put the monthly $100 ($8,000) in "the bank," you would have a fraction above $8,000 today.

Some would say, "Who could have known in March of 2009 that the stock market would recover?" After all, there could not have been a more dismal time in recent financial history.

While it’s never a good idea to try to predict the future based on the past, students of market history can gain insights to guide their investment decisions.

When you are young and contributing to your retirement plan at work or saving on your own through an IRA, monthly investing — especially during down market periods — works in your favor, but you can’t sell at the bottom.

Market downturns can be beneficial to anyone with a long-term investment horizon, especially when investing small amounts of money over time.

That said, when you are older, having accumulated significant assets for your retirement over a lifelong career, you may not find the ups and downs of the stock market invigorating. When approaching retirement, caution is in order.

On that point, a "60 Minutes" program on 401(k)s that ran at the height of the financial crisis was rebroadcast recently.

The moderator asked, "What kind of a retirement plan allows millions of people to lose 30 to 50 percent of their life savings just as they near retirement?"

A commentator said: "The fact is that the typical 401(k) investor is a financial novice. They don’t know a stock from a bond. And we give ‘em a list of 20 or 30 mutual funds with really, really powerful names, you know, they sound like, ‘Gee, that’s where I want to have my money.’"

Some people are novices indeed. But, there is no reason for that to be the case.

If you are a regular reader of my column and my books, you know that I believe in studying, researching, learning and studying some more.

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Copyright 2014 The Salt Lake Tribune. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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