Yesterday, we set yet another record – a gain of over 11% on all major stock indexes. It was an exhilarating rise after a weeks-long drop, but this is just one blip on the larger graph. We have no way of knowing what will happen for the rest of this week or the rest of this year, but I would be hesitant before buying like a mad man.

The Markets Are Fundamentally the Same

The problems that got us into this mess are still around. While actions are being taken by governments around the world, they’re just beginning their intervention and things aren’t going to turn around instantly. Yes, we have a glimmer of hope, but chasing hope is a desperate action.

It’s going to take some time before we find out whether the governmental action is going to work – this is certainly nothing that will happen overnight. While the new efforts are being tested and broken in, don’t be surprised if you see the market continue to drop like it did before.

Don’t Lose To “Sucker Money”

By all means, keep investing, but don’t believe for a minute that we’ve hit bottom. I have confidence that the market will turn around, I just don’t think it has yet. Nothing would make me happier than being proven wrong, but I think we have further to fall before we recover.

I heard an interesting phrase on the radio yesterday: Sucker money. After a long drop, there is usually one day where many people start guessing that the bottom has been reached and they start buying like crazy because they’re tired of seeing so much red. For that day or two, the markets will appear as though they have recovered, but the fall begins again. Those people who invested so much and still lost have been suckered out of their money by a fleeting market jump. As always, only invest what you won’t need for over five years and don’t invest anything you can’t afford to lose.

We’re Not Going To Bounce

The markets aren’t going to plummet then bounce right back with a huge gain. Unstable actions like that only cause more volatility. Instead, the market will settle to the bottom, then start easing back. 11% is fun to watch, but it’s just about as unstable as one can get in a recession. Enjoy it while it lasts, because we’re in this for the long run, now.

(c) 2007-2009, That One Caveman, http://www.thatonecaveman.com

I don’t check my 401(k) account very often; mostly, I check it to update my end-of-month personal balance sheet. But when the market is in such turmoil as it is right now, it’s hard to not check it at least once a day.

In the last few months, I’ve lost more than $3,000 but I don’t mind. My 401(k) value change year-to-date is almost -20% and I’m happy. Yes, you read that right – I don’t care that my account has hemorrhaged nearly one-fifth of its value. And unless you plan on retiring tomorrow, you shouldn’t either.

It’s a Long-Term Investment

Unlike my savings or checking accounts, I don’t plan on accessing my 401(k) for about four decades. In that amount of time, there will be wild swings in both directions. But, as long as history holds true, over time its value will continue to increase and hopefully double every decade. That means that even though I’ve lost a decent chunk of my account today, 10 years from now I should see its grow by 100% and completely offset any short-term loss I experience due to the financial market tumble.

So it makes sense that you shouldn’t care about major swings today, but why does that mean you should be happy?

Gobble Up the Bargains

Eventually, the market will start moving back up again. We don’t know how long it will take or how low it will go, but it will climb again. And because we know that, we also know that anything we buy today will grow even faster than the investments we bought when the markets were up.

The last thing you should do is follow the lemmings off the cliff and exit the market now. If anything, you should be buying more than ever to lower your cost basis and take advantage of the bargains out there. My wife and I have played with the idea of increasing my 401(k) withholding to take advantage of the present stock “fire sale,” but I think we’ll probably settle for independently saving and investing any surplus we find at least until our basement construction is complete.

Don’t Try To Time the Market

Since the markets are dropping at a pretty decent clip, it can be tempting to hold off buying until you think the markets have bottomed out. The problem is, you usually don’t know until much later where the true bottom was and it could rebound before you have the chance to lock in your purchase. Instead, you should buy all the way down (and back up again) and let dollar cost averaging lower your exposure to losses and to help you make the most of your gains.

Stop watching the markets and reading the financial news. None of that matters when you’re looking at a far-off time horizon. Instead, focus on building your wealth by taking advantage of the opportunity this bear market is offering you.

Here’s what some other bloggers think about what to do with your 401(k):

• 401k is losing money – crash and burn
• My 401(k) Is Losing Money, What To Do?
• Changing Your 401(k) in a Treacherous Market
• My 401K Is Losing Money, What Should I Do?

(c) 2007-2009, That One Caveman, http://www.thatonecaveman.com