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These Charts Show Why You Should Continue Investing During a Bear Market


The June 13 news that equities had officially entered bear market territory sent some investors reeling. The S&P 500, an index that tracks a broad spectrum of stocks, closed 21% below its January 2022 highs. The last time stocks tumbled so precipitously was during the onset of the COVID-19 pandemic, when markets fell amid mass lockdowns and shuttering businesses.

In the midst of current market chaos, financial advisors and other experts are cautioning investors against panicking and cashing out their stock holdings. That’s because selling in a frenzy can cause you to lock in losses – by selling holdings at a low price. And it can cause you to miss out on the recovery if you’re hesitant to put your money back into the market when stocks start to trend upward.

To illustrate this, we considered what would happen to the savings of an investor who paused 401(k) contributions during the 2001 or 2008 bear markets. (We chose not to use the 2020 pandemic-fueled bear market since it was short-lived and didn’t leave much time for contribution pausing.) If these investors halted contributions when the newspaper headlines started mentioning market crashes and didn’t resume investing until markets began to recover, how would their retirement accounts stack up now? Here’s what we found.

A financial advisor can help you manage your savings and plan for retirement. Find a local advisor today.

Our Analysis

We looked at the 401(k) savings of two types of investors during two bear markets, 2001 and 2008.

Here’s who they are: Each investor starts with $10,000 and maxes out his or her 401(k), based on federal limits. Each also secures an employer match, which totals about 20% of the person’s total contribution. For simplicity, all four investors maintain a 401(k) tracking the S&P 500.

But that’s where their stories diverge.

In each bear market, one investor panics when the headlines start labeling the downturn a “bear,” pausing all 401(k) contributions. The other investor stays the course and continues investing while securing an employer match. The panicker reenters the market when it starts to turn upward and maxes out his or her 401(k), receiving the employer match, until today.

Determining the Contribution Amount

To run this analysis, we assumed that the investors maxed out their 401(k) contributions based on the annual limits determined by the federal government. We also assume they earn monthly paychecks. For example, if the 401(k) limit in 2002 was $11,000 per year, we calculated the investors’ monthly contributions as $917 (or $11,000 split equally among 12 paychecks).

As the 401(k) contribution limit ticks upward year after year (it’s $20,500 in 2022 for an individual), the investors continued to increase their savings amount to reach that maximum. So, in 2003, the investor allocated $1,000 each month to max out a $12,000 annual limit. The next year, it was $1,083 a month to max out a $13,000 annual threshold.

In short, these investors are great savers and – outside of the panickers’ bear-inspired pauses – they save as much as Uncle Sam will allow.

Determining the employer’s match is a separate calculation. We assume it equals 20% of the investors’ contributions. (In reality, employers often calculate a retirement match as something like 3% of the employee’s salary, or 50 cents on the dollar, up to 6% of the employee’s salary.) But for illustrative purposes, and instead of estimating decades’ worth of annual salaries for these example investors, we made the employer contribution match 20% of the employee’s monthly contribution.

This allows us to increase the amount the employer matches every year – as the investor would presumably grow in his or her career and earn raises and promotions – and provides an example figure of what an employee would be leaving on the table when they forgo a workplace match.

The 2001 Bear Market

Investor 1 and Investor 2 have $10,000 at the beginning of the 2001 bear market. But in March 2001, the headlines start to warn of a bear market.

“Markets Plunge in a Wide Sell-Off; Nasdaq Falls 6%” announces the New York Times on March 13, 2001. Other headlines reflect similar doom and gloom. Investor 1 gets scared and contacts his retirement plan administrator. The next month is April, and Investor 1 has paused his monthly 401(k) contributions of $917.

That cessation also causes him to lose his employer’s match of $183 per month. Fortunately, the investor resumes contributions right as the market starts to trend back upward. His retirement contributions restart in November 2002.

Conversely, Investor 2 is made of stronger stuff. She rides out the bear market, continuing to max out her contributions of $917 per month and secure her employer’s $183 monthly deposit throughout the bear market.

Fast-forward to the end of 2021. These two investors continued to max out their investments for the 20 years following the 2001 bear market. They utilized identical S&P 500 investment strategies. But the damage of pausing contributions for about six months is reflected in their account balances. The difference? $1,104,653 versus $1,071,190, or about $33,500.

The cash that the panicked investor saved by opting out of his 401(k)? Just $6,417.

The 2008 Bear Market 

In the summer of 2008, headlines declaring a “meltdown” on Wall Street scare off Investor 1 who has $10,000 in her 401(k). She pauses her contributions of $1,292 in August and loses her $258 monthly employer match.

Meanwhile, Investor 2 remains steadfast through the downturn.

When the headlines start to cheer up, Investor 1 restarts her 401(k) contributions in April 2009. But nearly a year of paused contributions take a toll over the long term.

The damage: A deficit of $56,046 in her retirement account. That’s the gap between an ending balance of $727,618 and $671,572. In exchange, the panicker would have squirreled away just $10,583 in cash by pausing contributions.

Staying Invested During Bear Markets Can Pay Off

Generally, staying invested in your retirement account during a downturn like a bear market can pay off. The value of buying equities at discount, the beauty of compounding returns and the benefits of an employer match (and potential tax benefits included in company retirement accounts) often make sticking with your regular contributions a wise course of action.

Of course, there are individual scenarios in which a saver may need to pause contributions – for example, if he or she needs to prioritize building an emergency fund because of fear over a job loss or if the person is nearing retirement and has limited choices. But if you can afford to stay the course, it’s wise not to let fear get the best of your during even the ugliest bear markets.

Remember also, that while the 2001 and 2008 bear markets accompanied recessions, it’s not always the case that a downturn will go hand-in-hand with a recession. Each bear market has its unique attributes, but don't let it blow up your investing plan.

In addition, we did these investors a solid and assumed that the panickers identified the market bottom and were able to ride stocks back upward. In reality, it's often much more difficult to time the market, and these investors could further lose out on investment returns by restarting their retirement savings too late.

The Bottom Line

Don’t freak out during a bear market. Opting to halt retirement contributions can cost you down the line. If you're a pre-retiree or questioning how a market downturn can impact your retirement or emergency-preparedness plans, consider working with a qualified financial advisor. But if you have a financial plan that takes inevitable market downturns into account, stay calm.

Retirement Planning Tips

  • Work with a professional. From Social Security and alternative income streams to medical expenses and long-term care, there’s a lot to consider when creating a plan for retirement. A financial advisor can help guide you through this complicated process. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Trying to decide between a traditional and Roth individual retirement account? These charts show how Roths stack up against traditional IRAs.

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