It is extremely important to protect your 401k plan because volatility hurts. I want to tell you about something that I call the law of financial gravity. What does it mean? It means when something falls, it’s harder to get back up. It is usually easier to drop something than to pick it up.
What this means with money is that if you have $100,000 in the stock market and the market drops 50%, you are left with $50,000. Now on the flip side, if the stock market recovers the next two years and gains 50%, how much would you have in your account? Would that 50% gain be enough to recover from the 50% drop? Would you break even? Many people think so but in fact this is not the case. In reality you would only have $75,000.
A 50% drop on $100,000 in assets would bring you to $50,000. A 50% gain on $50,000 is only $25,000. A lot of people do not realize this. I call it the law of financial gravity.
This seems like a dramatic example but it is not far off from the roughly 40% drop that many Americans experienced when the market crashed in 2007 and 2008. From the bottom of the crash to the end of 2014, 5 years later, most Americans had only at best broken even. This is why it is important to learn how to protect your 401k plan. If the stock market tanks, your money doesn’t have to tank with it.
It’s just like one of my favorite Warren Buffet quotes “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” If you want to protect your 401k plan, never lose money.
Check out our post about Warren Buffet’s advice on investing. Click here