Summer is upon us. It brings vacations, barbeques, pool parties, and maybe a few lazy days of just relaxing.
Stock markets often join in the season’s take-it-easy spirit. In fact, there’s an old (but unwise) adage: Sell in May and go away.
Summer has historically been a sluggish season for U.S. and European stock markets. The U.S. market has, on average, shown better historical performance during the period from November to April. May to October has historically averaged a slower pace of growth.
Economists are predicting that this year will be no different. On top of the summer lull, we recently saw disappointing jobs numbers, the European debt crisis continues, and the U.S. is entering a period of suspended animation as the presidential election heats up.
Despite information that points to a potential slowdown, don’t follow the sell and go away motto with your retirement investing strategy.
Of course, investors can’t literally cash out 401(k) money in the summer and then reinvest in the fall. But there could be a temptation, among some retirement investors, to switch to cash equivalent investments and/or to halt payroll contributions during a quiet period. Don’t fall into that trap.
Consistent investing reduces risk and stress levels for average retirement investors. Continuing to contribute to your 401(k) throughout the year—while sticking with your asset class allocation—enables you to take advantage of dollar-cost averaging. With dedicated dollar-cost averaging, the average price paid per share will theoretically be lower than the average share price. Dollar-cost averaging becomes a particularly effective retirement investing strategy if you rebalance your allocation a couple times a year.
The flip side of dollar-cost averaging is market timing—trying to jump in and out of investments in a profitable manner resulting from buying low and selling high. The problem with market timing is that stock markets are unpredictable. You may buy low and sell high once, but it’s nearly impossible to do reliably or steadily.
Attempting to leave the market as summer starts and re-enter as summer ends is an example of market timing that could go very badly.
Since your retirement savings are an important part of your long-term financial stability, it makes sense to avoid big risks and stick with a dollar-cost averaging approach. Take comfort knowing that the long-term historical trend for the U.S. stock market has been to continue to move upward, admittedly with some volatility along the way.
And don’t feel badly if we do see the predicted summer lull. Slowdowns are healthy part of the investing cycle because they afford you the opportunity to buy investments at a cheaper rate.
So, rather than pining for a hot market, relax and enjoy the hot weather.
Lastly, in addition to planning your summer vacation, plan your retirement vacation.
Treat your retirement with the same level of enthusiasm you devote to your summer vacation. You can start with this checklist:
- Figure out where you want to go during retirement and what you want to do. If you’re within a decade of retiring, you can be fairly specific in your planning; otherwise, establish a general framework.
- Set a budget. How much will you spend each month? Your currently monthly budget is a good place to start, but remember that your budget will certainly change when you’re retired.
- Map the route you’ll take to build a nest egg to fund your retirement vacation. Include your savings and investing plans and goals in your roadmap.
In the meantime, have fun on that summer vacation.
Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.