Consistency Pays When Participating in Your 401(k)

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Do you participate in your 401(k) or other workplace retirement plan on a steady, consistent basis — regardless of market volatility or scare headlines?

If you were among those who did that during a five-year period that included the 2008 credit crisis, you were rewarded for your confidence and fortitude.

The average account balance of workers who participated in their plans consistently from year-end 2007 through year-end 2012 increased at a compounded average annual growth rate of 6.8% — despite a 34.7% drop in their average 401(k) account balance during 2008.

That’s according to a study by the Employee Benefit Research Institute and the Investment Company Institute. The report examined the behavior of 24 million 401(k) plan participants and found that a third of them — 8 million people — were consistent participants, meaning they did not reduce their contributions or shift out of stock funds during the five-year period.

By year-end 2012, according to the study, the average account balance of the consistent participants was 67% higher than the average balance of all participants, and the consistent group’s median balance grew 11.9% per year over the period — nearly three times the average for all participants.

These findings match the results of two similar studies by Fidelity, the nation’s largest 401(k) provider, released in 2013.

One of the Fidelity studies found that the average 401(k) balance reached a record high at the end of 2012, noting that about two-thirds of the jump in value came from market increases. Thus, as important as it was that you kept contributing, it was even more important that you stayed invested in the first place.

The second Fidelity study focused on workers who stayed with the same company over the previous 10 years and made no changes from 2008 through 2012; in other words, they stayed with the same investments. What happened to their account values? They quadrupled. The average account balance for those workers jumped 324% over the decade, from $47,100 to $199,800. During the same decade, the S&P 500 index rose only 62%.

The secret to their success: dollar cost averaging. By buying in 2008 and 2009 when many others were selling, they bought more shares with each dollar — and when those shares rose in value, their account values rose exponentially.

That’s why it’s so important to stay invested and keep investing — never selling in a panic because of media headlines, temporary market volatility, or what your co-worker or neighbor might be doing.

Originally published in Inside Personal Finance August 2015

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