How do Pigs Help you Invest in Your 401k?

It is hard not to get down about the investment markets when they are doing poorly. Most people feel a crushing blow when the market swings in the wrong direction. It is a mistake to over react to these swings in the market if you have a long term time horizon. Changes need only be made when your personal risk tolerance changes (nearing retirement, shifting goals), or when the risk changes inside an investment (style drifting, manager change). Even still people get nervous when their accounts lose money. Some people even stop investing in their 401k during these negative market cycles. 

The 401k can be your best ally during these cycles because you have an opportunity to buy while the funds in your account are on sale. To illustrate this point I tell a simplified story about Farmer Brown. You see Farmer Brown has a limited budget every month to buy pigs. Every month the farmer only has $100 to purchase the pigs he needs for his pig farm. Let’s look at the chart:

Month	Spent	Price of Pigs	Pigs Acquired
1	$100	$20	5
2	$100	$10	10
3	$100	$5	20
4	$100	$10	10
5	$100	$20	5
Total	$500	$10 per Pig	50

At the end of the 5 months, the farmer now owns 50 pigs. The current price of the pigs is the same as when he started at $20. He invested a total of $500 purchasing the pigs, but if he were to sell them at the end of the 5 months he could get $1,000. He doubled his money without the price of the pigs increasing over the $20 start price. 

Month	Total Invested	Total Pigs	Total Value
1	$100	5	$100
2	$200	15	$150
3	$300	35	$175
4	$400	45	$450
5	$500	50	$1000

This is the same principal for your 401k. Every month you purchase shares in whatever you have chosen. On the months where those shares are down you are buying more shares. It is easy to get caught up in the fact that the value is going down, what usually helps people understand is this pig story. Just remember when the market is down and you are considering pulling out or stopping your contributions completely, you are buying more pigs!!!