A new study from Fidelity Investments found that 401(k) investors who pulled out of the equities market during the 2008-2009 economic downturn experienced only 2% growth, while those who maintained their investment strategy eventually saw growth of 50% by the second quarter of this year.

The analysis confirmed that even during periods of extremely volatile market activity, investors who maintain a diversified asset allocation strategy and do not pull out of equities investments, or make sudden reductions in their contribution levels, are rewarded when the equity markets eventually rebound.

In the study, Fidelity analyzed participant actions during the market decline of 2008-2009 through the second quarter of this year.  The company found that for 401(k) plan participants who changed their equity allocations to 0% between Oct. 1, 2008, and March 31, 2009, the lowest months of the market downturn, and maintained this allocation through June 30 of this year, the cost to their account balance was significant. These participants experienced an average increase in account balance of only 2% through June 30.

On the other hand, plan participants who dropped to 0% equity but then returned to some level of equity allocation after that market decline saw an average account balance increase of 25%, a sharp contrast to those who stayed with an asset allocation strategy inclusive of equities. These participants realized an average account balance increase of 50% during the same period.

Fidelity also examined participants who stopped contributing to their 401(k)s during the same market decline of 2008-2009. They experienced an average increase in their account balances of 26% through the end of the second quarter, compared to 64% for participants who continued making regular contributions.

Cohn is the editor of Accounting Today, a Source Media publication.

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