How to Protect Your 401(k) From a Market Crash or Recession
You can’t control what happens in the stock market, but you can control what YOU do when there’s a downturn. To safeguard your savings, follow these investing golden rules.
You’ve saved all your life to build up your 401(k) plan, and now in this period of stock market turbulence, you’re worried about substantial losses. What can you do? Here are some suggestions for how to protect your 401(k) from a market crash or recession.
Of course, you can’t control what happens in the stock market, so focus on what you can control: yourself. Follow these simple tips to minimize your losses and maximize the chances that you’ll stay on track for a secure retirement.
Tip #1: Diversify (Duh!)
Yes, you’ve heard it before, but it bears repeating: One way to protect your portfolio is to stick with the tried-and-true strategy of diversification.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
It’s very unlikely that if you’re spread out over a number of different investment asset classes that they’ll all fall the same amount, and you might even see some go up.
The idea in being diversified is to increase the odds that your overall return will do better in a market drop than if you overweighted in a small handful of investments that happened to fall hard.
And while you’re at it, in light of the current higher inflation, if your company plan offers funds that provide an inflation hedge like REITS or TIPS funds, you may want to consider including these as part of your portfolio.
Be sure to rebalance your portfolio once a year to bring the percentage of money invested in the different funds back in line with your original asset allocation. This will prevent overweighting in areas of the market that may do well for a while but then end up dropping, which could subject you to bigger losses.
Tip #2: Keep Contributing Despite Downturns
Another important thing you can do to mitigate market losses in a market crash or recession is to continue contributing on a monthly basis into your 401(k) plan even as the market is going down.
This allows you to buy stocks at a cheaper price to compensate for some of the stocks that you may have bought at a higher price.
This is a form of dollar-cost averaging, which most of the time will help you get an average price on your shares that will be lower, compared to someone who gets rattled and discontinues buying shares every time the market goes down.
Tip #3: Know Your Risk Factor
One of the best remedies to make sure you don’t panic and pull your money out of the market after a big drop is to assess your risk tolerance, preferably before you start investing in your 401(k) plan. There are a number of risk-assessment tools, such as Riskalyze, that can help you do this.
For example, if the risk assessment shows you cannot tolerate more than a 10% drop in your portfolio, you can invest more heavily in bonds and cash equivalents and less in stock.
If it still turns out your portfolio has fallen more than you can stomach, the best thing to do before you bail out is to pause and think about it. Perhaps even talk to a friend with more experience investing in stock.
You also might consider simply reducing your stock levels to a more tolerable percentage of your portfolio rather than pulling out completely.
You may not recover as fast when the market goes up, but if the market continues dropping for a while, your downside risk will be more limited.
Remember: If you do pull out completely near the bottom, you may miss the recovery if history repeats itself and the market rebounds, which so far it always has.
Tip #4: Don’t Bet So Much on Your Employer
To reduce the chances of getting in the unfortunate situation where your company stock has a severe drop or actually becomes worthless, do your homework and learn some things about your company’s financial condition before you buy company stock in your 401(k).
Even if you conclude that the company you work for is in good financial shape, it’s still a good practice to not put more than 5% or 10% of your 401(k) funds into your company stock.
Just ask the employees of Enron who did this and saw their company stock become worthless.
Nothing in life is ever 100% certain, and that certainly includes investing in a 401(k) plan, but if you follow these time-tested principles of investing, the odds are you will be prepared for a comfortable retirement.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Eight Key Steps to Take When Investing in the Stock Market
The stock market can be a confusing place for beginners, but it doesn't have to be.
By Kiplinger Advisor Collective Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Talkin' 'Bout My Generational Wealth: Baby Boomers
With retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
By Alvina Lo Published
-
How to Avoid a Big Hassle if Your Financed Car Gets Wrecked
How an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
By H. Dennis Beaver, Esq. Published
-
Estate Planning Strategies to Consider as Election Nears
Are big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
By David Handler, J.D. Published
-
How to Get Your Money's Worth From Your Financial Adviser
A good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
By Pam Krueger Published
-
Think of Prenups and Postnups as Financial Planning Tools
These contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
By Andrew Hatherley, CDFA®, CRPC® Published
-
Congratulations on Your Raise: Three Things to Do With It
We're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
By Andrew Rosen, CFP®, CEP Published
-
Check Off These Four Financial Tasks to Finish 2024 Strong
The new year is a popular time to set financial goals, but now is the ideal time to check how you're doing. Four tweaks could make a big difference.
By Daniel Razvi, Esquire Published