What Does the Stock Market Have to Do With a 401k or IRA Investments?
BY Josh Zahn
Setting aside money today to make sure you have enough for the years down the road by starting a retirement fund can be extremely beneficial. It's important to note that the government (and many businesses) offers incentives to save. Putting aside money into an appropriate qualified retirement plan, such as an individual retirement account (IRA) or a 401(k), has significant tax advantages for how your money grows down the road. You may even get a match from your employer to contribute to these plans. One of the most common investment options within retirement accounts is stocks. More specifically, Mutual Funds or ETFs. Exploring why stocks or the stock market can greatly affect the value of these accounts can help you understand what’s happening and keep perspective during volatile times.
Advantages to investing in the stock market
One look at the historic rate of return of the major asset classes shows that the stock market has given some of the biggest returns for your money. Stocks historically have produced long-term gains. Since 1926, large stocks have returned an average of 10% per year. What's more, there has never been a negative 20-year performance period in those stocks, specifically the S and p 500. Those qualities make stocks much more appealing for long-term savings than, say, bonds (which have had about 6% average annual gains since 1926) or stashing cash under your mattress. Stocks' return potential gives them the best chance to beat inflation over long periods. That's why they're an essential part of a good retirement portfolio.
However, investing in stocks in not without risks
This is why working with an advisor to help you with critical fundamental principles with your portfolio construction is very beneficial. A few key things to keep in mind are:
- Try to keep emotion out of your investment decisions
- Timing the market is tough, and timing it wrong can have major consequences.
- There’s always something to be worried about. Remember “This too shall pass”.
The bottom line..
Diversification, time in the market and a steady head can help you achieve your long-term financial goals by avoiding the pitfalls of emotionally driven, badly timed mistakes. When times get tough in markets and make you feel nervous, remember the lessons from tried-and-true investing principles.
Now that you have a better idea of how the stock market can affect your retirement portfolio, just keep in mind that as we get older, we may want to reduce our potential risks in markets while still having our money work hard for us. A common mistake when we retire is to get too conservative with our nest egg and outlive it. Continue to have faith and set yourself up well with a financial plan BEFORE retirement so you have a gameplan FOR retirement.
If you are looking for a financial advisor team focused on your unique financial situation, communicates openly, and that puts you and your goals at the center of the relationship, call us at (480) 507-2425 or contact us online. We’d love to meet you!
The content in this article was prepared by the article’s author. Cetera Advisor Networks, LLC does not endorse its content, and the views expressed may not necessarily reflect those held by Cetera Advisor Networks, LLC.