Sunday, November 21, 2010

How to Double Your 401k (in a decade).

Here's an interesting post on a recent Fidelity announcement that stated that many of their pre-retirement customers doubled their 401k balance during the "lost decade."

By itself that's not saying much since your money should double about every 7 years with a 10% return, which is often cited as what the U.S. stock market has returned historically. But when you consider that the supposed lost decade is one where the S&P 500 had a -4.2% return, doubling your 401k during that time is significant.

So, how did Fidleity participants double their 401k balances?

The same way I did.

When the market tanked in both 2000 and 2008, the Fidelity participants who doubled their balance increased or maintained their 401k contributions. In other words, they bought more shares on the way down - buying low(er). Once the market bottomed and rebounded, they had more shares to magnify their eventual returns.

Of course, this works best in a diversified account of mutual funds, since buying more shares of an individual stock can be more risky if that stock happens to go belly-up before the market turns around.

It's also a bit ironic that just when investors should be doubling down on their investments (provided they are indeed sound investments, and that the investor has done his homework) is when most of them panic and sell, only to magnify their losses instead of their returns.

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