This is a classic investor dilemma. When the markets are roaring, with 15-20% returns, it is tough to imagine putting your money elsewhere. In fact, when the markets churn out 15-20% returns, people actually tend to borrow money to invest in stocks.

Of course, when the markets are down by the same amount, especially over the course of a few years consecutively, it seems pretty easy to find more productive, useful, and fun places to invest that money. Even if you're not making huge profits buying and selling houses or cars, you at least feel like you're doing something productive. However, before you trade in your 401(k) for a Ferrari or a beach condo, try to employ the following three principles.

First, every long-term investor should focus on diversification as a core principle. If your portfolio has become top-heavy with just a few positions, you'll want to consider rebalancing toward not just other stocks or mutual funds, but also toward fixed income investments such as bonds and real estate.

Second, if at all possible, you should continue to invest funds regularly into retirement and college accounts. This process of dollar-cost averaging helps to ensure that your purchases that have temporarily declined in value are offset with new purchases at much lower prices.

Third, timing the market is nearly impossible. Over the last 80 years, equity markets have continued to provide an annualized return in the ballpark of 10%. Much of this return, however, is due to relatively short bursts of growth that happened before most cautious investors regained confidence to reenter the market. To have a fighting chance at earning double-digit returns in the stock market, you'll need to have your money invested properly before the market turns around.

(For more on this subject, read The Stock Market: A Look Back, Dollar-Cost Averaging Pays, Dollar-Cost Averaging DCA, Diversification, The Importance of Diversification, Market Timing Fails As A Money Maker)

This question was answered by Ken Clark.

  1. Are catch-up contributions included in the 415 limit?

    Unlike regular employee deferrals, catch-up contributions are not included in the 415 limit. While there is an annual limit ... Read Full Answer >>
  2. Can catch-up contributions be matched?

    Depending on the terms of your plan, catch-up contributions you make to 401(k)s or other qualified retirement savings plans ... Read Full Answer >>
  3. Are catch-up contributions included in actual deferral percentage (ADP) testing?

    Though the Internal Revenue Service (IRS) carefully scrutinizes the contributions of highly compensated employees (HCEs) ... Read Full Answer >>
  4. Who offers 401(k) plans?

    401(k) plans are one of the most common retirement plans available. A 401(k) plan must be offered by a business. These plans ... Read Full Answer >>
  5. Where can you buy NetSpend reload packs?

    You can only purchase NetSpend reload packs at Giant Eagle, Albertsons, Roundy's and Pathmark supermarkets. NetSpend cards ... Read Full Answer >>
  6. Can a 401(k) be used for a house down payment?

    A 401(k) retirement plan can be tapped to raise a down payment for a house. You can either borrow money or make a withdrawal ... Read Full Answer >>
Related Articles
  1. Savings

    How Americans Can Open a Bank Account In Thailand

    Have your paperwork in order and be sure to shop around.
  2. Savings

    Opening a Bank Account in Costa Rica as an American

    It shouldn’t be too hard to do, provided you have the appropriate documentation and forms. But be prepared for lots of paperwork!
  3. Insurance

    Cashing in Your Life Insurance Policy

    Tough times call for desperate measures, but is raiding your life insurance policy even worth considering?
  4. Mutual Funds & ETFs

    The 8 Most Popular Vanguard Funds for a 401(k)

    Learn about some of the mutual funds in Vanguard's lineup that are popular among 401(k) investors, and find out why you should consider them.
  5. Entrepreneurship

    How an Internet Sales Tax Will Affect Your Small Business

    Learn about how the Marketplace Fairness Act may impact small business owners should it pass in the House and what the act requires from business owners.
  6. Financial Advisors

    How to Help Plan Sponsors Meet Fiduciary Duties

    Advising 401(k) plan sponsors is a great business model for financial advisors. Here's how advisors can help plan sponsors meet fiduciary obligations.
  7. Savings

    Craft Beer Clubs – Bargain or Not?

    If you're an aficionado of artisanal brews (or would like to be), a beer club can be a palate-pleasing, albeit pricey, way to expand your hops horizon.
  8. Retirement

    What Happens to a 401(k) After You Leave Your Job?

    Find out what happens to your 401(k) after you leave your job. Learn about your five primary options, including cashing out and rolling over to a new plan.
  9. Retirement

    How 401(k) Matching Works

    Find out how employer matching of your 401(k) contributions works, including how employer contributions are calculated and annual contribution limits.
  10. Savings

    A Quick List of FSA Eligible Expenses

    The ABCs of FSAs: What you can and can't use your Flexible Spending Account funds for.
  1. Futures Market

    An auction market in which participants buy and sell commodity/future ...
  2. Capital Markets

    Capital markets are markets for buying and selling equity and ...
  3. Equity Market

    The market in which shares are issued and traded, either through ...
  4. Duty Free

    Goods that international travelers can purchase without paying ...
  5. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
  6. Market Value

    The price an asset would fetch in the marketplace. Market value ...

You May Also Like

Trading Center