The truth is: the stock market goes up and down in cycles.  These cycles usually last 5-10 years.   Take a look at the chart below.

This is the 10 year chart for the Vanguard S&P 500 Index Fund (VFINX), which represents the 500 largest companies in the United States.  As you can see, the price in Oct 1998 is similar to the price in Oct 2008.

So, if you invested $1000 in Oct 1998, you saw your money grow substantially in 2000, then you saw it drop again in 2002, rise again in 2007, and then drop again in 2008.  What a roller coaster!

If you invested one time in Oct 1998 and just sat on the money for 10 years, you pretty much broke even over this span.  Not a very good return on your money.

But, if you have been investing in your retirement plan regularly, then you’ve been dollar cost averaging.  You bought shares at the lows in 1998 and 2002, and at the highs in 2000 and 2007, and everything in between. Depending on your timing, you may have even made some money.

Here’s the scoop:

1. If you’re nearing retirement you need to remember that you probably won’t need all your retirement money when you retire.  The best strategy is to slowly withdraw the money every month or quarter over your many years of retirement.  By that time the stock market should recover, because it usually fluctuates in 5-10 year cycles.
2. You may want to consider increasing your contributions to your 401k plan.  That’s right– increase!  The stock market is on sale, so why not take advantage?

Either way, just remember, you don’t lose your money until you sell.

I am interested to know what you’re doing with your retirement account.  Please leave a comment below.