401K Plans: Time in the Market, not Market Timing

It is an appealing concept: invest in the stock market at the point when the market begins an uptrend, ride it until stock values peak, and then switch to cash investments or bonds just before the stock market begins to falter. This approach to investing is known as “market timing.” Unfortunately, it has one big flaw: it assumes that you will be able to pick the exact moments when you should move into and out of the stock market. The reality is that trying to time the stock market’s highs and lows is extremely difficult, if not impossible, and timing the market incorrectly could adversely affect your portfolio’s growth to a significant extent.

However, time in the market makes sense. Consistently saving for your retirement combined with the power of compounding can build up your retirement savings over time. The longer your money is invested, the greater the potential benefit from compounding.

A fully diversified portfolio invested for the long term can help manage risk in your portfolio and potentially improve your portfolio’s performance. Diversification lets you take advantage of the fact that cash, stocks and bonds typically don’t all move in the same direction at the same time. If the value of one asset class falls, the value of the others may rise or hold steady, helping to offset possible losses.

Remember, diversification does not ensure a profit or protect against loss in a declining market.