When it comes to your 401(k), there’s one piece of advice that most financial experts agree on in market routs like this: Stay the course.
That means fighting the natural temptation to log into your investment account and react to the market’s big swings.
However, many investors are not taking that advice, according to the latest data from the Alight Solutions 401(k) Index, which tracks daily activity at 401(k) plans provided by large employers.
The index shows that trading activity on Thursday, Feb. 27, was 11.37 times average. Only two other dates have exceeded the 11 times average. Those were Jan. 22, 2008 and Feb. 5, 2018.
“Even in the depths of the financial meltdown in October 2008, we didn’t see this type of abnormality,” said Rob Austin, head of research at Alight.
If you’re like a lot of people, you’re also looking for reassurance that your nest egg will still be OK. The key to that is to revisit your plan.
“Most people should do what’s good for them, agnostic of what the market is doing,” said Aaron Pottichen, senior vice president at Alliant Retirement Consulting in Austin, Texas.
“No one can time if the market is going to go up or down,” he added. “But we do have control over what our plan is.”
Remember your long-term time horizon
When making decisions as to what actions fit you best, your age is a key factor to keep in mind.
“If you’re 70 years old, you have no business having 70% of your money in the stock market,” said Ted Jenkin, certified financial planner and CEO of Oxygen Financial in Atlanta. “You should have 70% of your money in fixed income.”
Marguerita Cheng, a CFP and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland, said she encourages investors to allocate their investments in buckets.
Money for short-term goals should be in safe investments, while funds for intermediate and long-term needs can gradually get more risky.
Retirees, in particular, may want to put money for required minimum distributions in a stable value fund or short-term bond fund, Cheng said, where they likely will not have to sell at a loss. Those mandatory distributions start when you reach age 72.
Protect your near-term goals
One thing to consider as you’re evaluating your 401(k) and other investments in turbulent times is how soon you will need the money.
“Stock ownership should always be for a long-term hold: five-plus years,” said financial advisor Scott Hanson, CFP and co-founder of Allworth Financial In Sacramento, California.
If you have money tied up in stocks that’s earmarked for your child’s tuition next semester or for a down payment for a house, now is the time to sell, Hanson said.
For goals with a time horizon of five years or less, consider moving that money to a stable value or fixed income funds, Jenkin said.
While the returns on those investments are lower, you also don’t have the risk of losing 20% to 30% of your money, he said.
When to buy the dip
Down or volatile markets provide an opportunity to buy stocks when prices are lower.
That means you want to keep contributing to your 401(k) or other retirement funds, where you’ll be dollar-cost averaging, or buying investments on a fixed schedule, Cheng said.
“If they’re not comfortable, they can pare down the risk in their existing dollars, but keep their ongoing contributions the way they are,” Cheng said.
Another tip to consider when markets are low: Ask your payroll department to take more out of your paycheck to put in your 401(k) for one pay period, Jenkin said.
As long as you have money in savings to pay your bills, putting more money in the market when it is low can mean a greater upside when it recovers. “That can be a really good opportunity,” Jenkin said.
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