I spent over twenty-five years as a financial advisor, helping thousands of clients make better investment decisions. While it was comparatively easy to convince people to save for college and fund an IRA, I was amazed at how difficult it was for some people to see the merit in contributing to a 401k plan. Among the most common excuses was that they had been participating in a plan but were discouraged by lackluster investment results and quit.

Unless you are very close to retirement age – less than five years away – then you shouldn’t pay much attention to investment results at all. Why? Because in the long run the only value that really matters is what your account is worth on the day you retire. Until then it is strictly an accumulation vehicle, changing in value based on only two criteria: (1) contributions and withdrawals of principal, and (2) investment performance.

For nine years I traveled the country advising employees of a major corporation on how to make the most from their employer’s retirement plan. Many of the people I met with wanted to spend most of the time talking about how to improve short term investment performance by either timing the market or concentrating their money in a small number of funds that might significantly outperform the market.

It took me a while to figure out how to do it, but eventually I was able to convince them that even a static portfolio, if properly diversified, would do almost as well as one that was “optimized” for performance. The reason why has to do with something known as “dollar cost averaging”, which almost assures you of achieving above-average results in the long run.

The idea behind dollar cost averaging is pretty simple: You contribute a fixed amount of money on a periodic basis to an investment account. When the market is strong and appreciating in value that same dollar amount buys fewer shares, but when the market is weak and has depreciated in value that same dollar amount buys more shares of the same investment.

Here’s a simple example: each month you contribute $100 to a mutual fund. In the first month the fund is priced at $10 so your contribution buys exactly 10 shares. The next month the fund has doubled in value, so your $100 now buys only 5 shares at $20 each. The next month the fund price drops all the way down to $5, allowing you to pick up 20 new shares at the greatly discounted cost. Finally, in the fourth month the share price reverts to its original value of $10, once again allowing you to buy 10 more shares.

So at the end of those four months the share price of your investment is no better or worse than where it started, but you now own 45 shares for your $400 in total contributions, making your average buy price, or cost basis, come out to $8.89 per share. Had the share price stayed at $10 the entire time you would own only 40 shares at an average cost basis of $10.  But via the magic of dollar cost averaging you have squeezed at an 11% gain during a period of time when the net change in the value of the underlying investment was zero.

A 401k plan effectively works in a similar manner; each pay period contributions are deducted from your paycheck and then used to purchase investments in your account.  Most folks have a set percentage deducted from their pay, which tends to be a fairly constant amount for salaried employees. Over time your pay (hopefully) will gradually increase so the analogy is not perfect, but the overall impact on your long term investment performance should be similar.

To illustrate this point I like to use an example that I refer to as “feels bad/feels good” to show how human emotion can lead to bad decisions. In the table below I make a set of simple assumptions: Andy and Bob are co-workers earning the exact same salary and making the exact same contributions to their 401k plan accounts. They each contribute $5,000 annually for ten years, but invest in two very different types of mutual funds.

Unfortunately for Andy, for the first five years the share price of his investment portfolio drops 5% every year, while Bob’s share price grows by 10% annually. At the end of five years Andy’s account is worth only $21,491 while Bob’s is worth $33,578 – a whopping 50% difference! At this point Andy feels disillusioned and may decide to drop out of the plan altogether, which could be a huge mistake. Here’s why.

The next five years witness a reversal of fortunes of sorts; Bob’s share price continues to grow, but at only a 5% rate each year, while Andy’s share price grows at 10% annually. So, Bob never had a single year where his share price went down in value, while Andy’s share price only went up in value half the time. And if you average the annual return each year you may think that Bob’s annual average share price appreciation of 7.5% would substantially outperform Andy’s average return of only 2.5%.

But you would be wrong, and dollar cost averaging is the reason why. During the first five years that Andy’s share price was dropping in value his contributions were buying a lot more shares than Bob was able to buy since his share price was appreciating. Ten years later Andy’s share price is still lower, but he owns a lot more shares. In the end there is only one calculation that matters, and that is the number of shares owned multiplied by the share price at that time.

Although Bob does end up faring a bit better than Andy, the difference is far less than what most people would guess. Bob’s ending account value of $71,865 is about 5% more than Andy’s ending account value of $68,189. But that shouldn’t deter Andy from sticking with the plan. He still earned a good pre-tax return on his money (keep in mind each of them invested a total of $50,000 over the ten years), and he probably would not have saved as much through an IRA or other investment vehicle if he dropped out of the plan.

When it comes to managing your 401k account, most long time financial advisors like me will all tell you the same thing; (1) stick to the plan, (2) don’t second guess the plan, and (3) the only value that matters is the one at the end. Don’t let short term market cycles or temporarily under performing investment accounts convince you to stop participating in your plan; instead, view dips in the market as an opportunity to acquire even more shares that will be that much more valuable when you really need them down the road.