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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free 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.
-
The Mulligan Rule of Retirement — Seven Mistakes You Can FixUse the Mulligan Rule to undo these seven costly retirement errors. While you can’t go back in time, some retirement choices allow for a “correction shot.”
-
My First $1 Million: Retired Educator/Administrator, 67Ever wonder how someone who's made a million dollars or more did it? Kiplinger's My First $1 Million series uncovers the answers.
-
From Pets to Paintings: The Little Things That Can Cause Big Estate TroubleSentimental items might have little monetary value, but their disposition can cause hurt feelings. Talking about who wants what and labeling items can help.
-
The Clock Is Ticking: Take Advantage of These Retirement Tax Benefits While They LastRecent tax changes, including an extra $6,000 deduction for those 65 and older, present a golden opportunity for retirees to reduce their tax bills.
-
I'm a Financial Adviser: This Is Why Unmarried Same-Sex Couples Need an Estate PlanWhen illness or death occurs within an unmarried same-sex partnership, family members can step in and push the surviving partner out. An estate plan is vital.
-
A Financial Planner's Guide to a Stress-Free Adventure AbroadStart by looking at flight/accommodation costs, have a flexible schedule, seek out credit card rewards, prep for health issues and plan to cook your own food.
-
I'm a Financial Planner: This Is How Smart Women Can Plan for Financial Freedom Despite Life's CurveballsProactive planning and professional guidance can help to build your confidence and give you clarity when you're navigating major life transitions.
-
Parents and Caregivers: Don't Miss Your Roth Conversion WindowCaring for a child or parent can mean a drop in income and a lower tax bracket. Why not take advantage by moving money into a Roth account? Here's how it works.
-
Testing the Retirement Waters in Florida? A Partial Plunge May Negate Tax BreaksMost folks know Florida is a tax-friendly state, but they might not know that part-time residents may not qualify, as our cautionary tale shows.
-
Catch-Up Contributions for Higher Earners in 457(b) Plans: What You Need to KnowGovernment 457(b) plans are about to get more complex as new Roth catch-up requirements come into force. Here's how to prepare for the changes.
