“Why should I stick with an investment that is losing value? That doesn’t make any sense.” This question was asked of me by the husband of the woman I mentioned last week, who had reallocated all of her 401(k).

In last week’s post I wrote about the guiding principle I use when trying to decide whether to stick with an investment or overall strategy, particularly in a down economy. Basically it helps to think long term.

This week I want to discuss why you might just want to ride that “loser” of an investment. Deciding to do so relies heavily on the type of investment. If it is part of your 401(k) or something similar where you are making regular purchases, it can be great. On the other hand, if you bought, say a mutual fund in one lump sum a year ago and don’t necessarily plan to buy any more, this may not apply as well.

The reason why is that the regular purchases mean you are still buying shares even though the value has gone down. Assuming that we are only going through a down cycle and that the market will eventually recover, you will be buying a lot more shares at a lower price than you had been when the economy was strong. Then as the economy recovers back to where it was, everything you bought while the economy was in a slump will increase significantly.

Look at this chart below for an example of how people tend to invest, causing their retirement to perform poorly.

Stock market performance from 1999-2009

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It is common for people to get scared and sell their investments or stop buying new shares as the economy’s growth starts to slow (A). Then, during the lowest point (between A and B), people do nothing because the economy and the market are doing so poorly. Finally, as the economy begins to recover, people gain confidence and reinvest in the market (B). However by that time they have missed out on the opportunity for great earnings.

Often, it takes a steady hand and a calm head to be patient and brave and ride the loser that can become a winner. We hear people lament they don’t have the luck to pick investments at the right time. Investing through a recession can make the difference.

That’s my take. Feel free to share your two bits.

Related Posts:

• If My Employer Drops the 401(k) Match, Should I Still Contribute (Part II)?
• Should I Change My 401(k) or Retirement Investments?
• Should I Pay Off Debt or Invest?
• If My Employer Drops the 401(k) Match, Should I Still Contribute?