If you’ve kept your eye on either your investments or media headlines in the past two years, you know it’s been a wild ride for the stock market! In 2017, we experienced a banner year with both the Dow Jones and the S&P 500 reaching record highs, not to mention the milestone of the longest bull market on record. (1)
But market fluctuations are a normal and expected part of the economic cycle, and what goes up must come down. 2018 ushered in increased market volatility that doesn’t look like it’s going away anytime soon. In October 2018, the volatility index hit its highest level since February, (2) which was the most volatile month we’ve seen since 1996. (3) And at the end of October, the stock market fell drastically, wiping out all of 2018’s gains to date. (4) We are only a few weeks into 2019, but the markets have already taken big dips in reaction to fears of potential trade wars and an economic slowdown.
With these facts in mind, it’s not surprising that many of us, particularly those nearing retirement, are worried about the impact a market downturn may have on our 401(k). It’s easy to get excited and rest easy while the markets are soaring and returns are positive, but what happens if we see a meaningful downturn in the markets?
What Makes A 401(k) Unique?
A 401(k) plays a unique role in your financial planning and is different from other accounts in a few ways. First, you likely receive your 401(k) from an employer who may match contributions, encouraging you to contribute a larger percentage of your income. You can also choose how and where your money is invested, your contributions are made on an after-tax basis, and you and your employer can contribute, at the maximum, jointly up to $56,000 (for 2019) or $62,000 for those age 50 or older.
However, a 401(k) does require maintenance. If the stock markets crash, you want to make sure your 401(k) investments are allocated properly. So what can you do to protect your 401(k) in the event of a downturn?
Avoid Emotional Investing
First, let’s talk about what you shouldn’t do. One of the most important rules in investing is to refrain from making emotional decisions. Multiple studies have analyzed how our emotions affect our investing results, especially when we chase above-average returns. A 2015 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. (5) Simply put, behavioral biases lead to poor investment decision-making.
You also don’t want to start making major changes to your account in anticipation of a downturn. Erring too much on the side of caution too many years ahead of retirement may prevent you from gaining the potential returns you need to retire on your terms. For example, in a panic, some investors may sell stocks and pursue safer investments like annuities, bonds, and cash.
Adhere To Time-Tested Principles
If you want to feel confident during a time of market turmoil, be prepared and knowledgeable about how your 401(k) can handle market volatility. Here are a few ways you can accomplish this:
Start With A Firm Foundation
Choosing the funds and amounts in your 401(k) can be confusing. You don’t want to pick them at random or settle on particular investments out of confusion. While you can readjust your allocation after the fact, it’s better to start off on the right foot. When you set up your account, take the time to speak with a financial professional who can help you determine your time horizon and risk tolerance. These two factors will drive your asset allocation, help you align your risk to your situation, and strive to limit the downside to your comfort level.
Have A Long-Term Perspective
The markets are always changing. If you check your portfolio performance every time there’s a shift in the markets, you will end up feeling overwhelmed and stressed. If you maintain a long-term perspective and stay disciplined in your approach, especially if you’re more than 10 years away from retirement, you can feel confident in your plan.
Maintain Proper Asset Allocation
Your portfolio should be reviewed annually to ensure that it still reflects your appropriate level of risk. If it doesn’t, you may need to rebalance to keep your portfolio on the right track. Rebalancing consistently is one of the most proactive measures an investor can take to avoid feeling the burn of a market downturn.
Know The Facts
Knowledge is essential for making informed decisions. Avoid falling prey to the media, which tends to exaggerate. Instead, stick to the information you’ve gleaned from your financial professional and what you know about your personal risk tolerance and goals. If you’ve taken the time to follow through with all of these steps, you may not need to take action during a market slump, and it may make more sense to stay the course.
Prepare Yourself And Your 401(k)
The only long-term guarantee in investing is that there will be short-term fluctuations. We’ll experience bear and bull markets in the decades ahead, just as we have in the past decades. Rather than fear change, focus on preparing for it.
By using a disciplined approach, focusing on the long term, and working with an objective advisor who understands investor behavior, you can keep your 401(k) on track and work toward your retirement goals. To learn more about your 401(k) and the factors that matter for your circumstances and needs, click here to access our online calendar and easily schedule a free 15-minute introductory phone call, or you can email us at email@example.com or call 610.727.3960 to schedule a meeting today!
Vincent R. Barbera, CFP®, MSFS is a managing partner and co-founder of Newbridge Wealth Management, a private financial counseling firm located in Berwyn, Pennsylvania. Believing in a patient, disciplined approach to investment management that delivers value and peace of mind, he utilizes a process-driven approach to financial planning that provides comfort and clarity to his clients’ long-term goals. Along with a bachelor’s degree in psychology and business, he has a master’s degree in business and financial planning and Certified Financial Planner™ designation. Learn more by connecting with Vincent on LinkedIn, or send him questions at firstname.lastname@example.org.