How to protect your 401(k) in a bear market

Editor’s note: This is an updated version of a story that originally ran on August 29, 2022.

Stocks and bonds are trading in bear territory. And given the current circumstances, it’s fair to assume the markets will stay fleeting for a while.

Interest rates in the US and Europe are rising rapidly as governments try to contain rampant inflation. fears of recession remain. And a sharp fall in the British pound coupled with rising UK debt costs is a cause for concern.

After being beaten up in the first half of 2022, so win something back Having lost ground, stocks are once again deep in the red for the year, with the S&P 500 down more than 20% year-to-date. The S&P US aggregate bond index, meanwhile, is down about 14%.

And investors may see much more churn over the next year.

“Markets are likely to be volatile — both up and down — over the next six to 12 months as the Federal Reserve continues to hike interest rates to fight inflation,” said Chris Zaccarelli, chief investment officer of the Independent Advisor Alliance . “If you’re planning to buy stocks at this point, you have to be patient and hold those positions for a much longer period of time than many people are used to — maybe two to three years in some cases.”

While it may be a bumpy road, here are some ways to mitigate the potential damage to your long-term nest egg.

Bear markets can take a toll on your psyche. There may be times when you are tempted to sell your stock investments and convert the proceeds into cash or a money market fund.

You’ll tell yourself that when things improve, you’ll put the money back into stocks. But if you do this, your losses will only be locked.

If you’re a long-term investor — which includes people in their 60s and early 70s who may be 20 or more years into retirement — don’t expect to outsmart the current downtrends.

When it comes to investing successfully, “it’s not about market timing. It’s time to get into the market,” said Taylor Wilson, a board-certified financial planner and president of Greenstone Wealth Management in Forest City, Iowa. “During bull markets, people tend to think the good times will never end, and during bear markets, they tend to think things will never be good again. Focusing on things you can control and implementing proven strategies will pay off over time.”

Suppose you invested $10,000 in the S&P 500 in early 1981. That money would have grown to nearly $1.1 million as of March 31, 2021, according to Fidelity Management & Research. But if you missed just the five best trading days in those 40 years, it would only have grown to about $676,000. And if you sat out the best 30 days, your $10,000 would only have grown to $177,000.

If you can convince yourself not to sell at a loss, you may still be tempted to stop making regular contributions to your retirement plan for a while, thinking you’re only throwing good money after bad.

“This is difficult for many people because the knee-jerk reaction is to stop contributing until the market recovers,” said CFP Sefa Mawuli of Pavlov Financial Planning in Arlington, Virginia.

“But the key to 401(k) success is consistent and ongoing contributions. By continuing to contribute during down markets, investors can buy assets at cheaper prices, which can help your account recover faster after a market downturn.”

In fact, if you can make it financially, Wilson recommends increasing your contributions if you haven’t already reached the maximum. Besides the value of buying more at a discount, he said, taking a positive step can offset the anxiety that can arise when you see your nest egg (temporarily) shrinking.

life happens. plans change. And so may be your time horizon until retirement. So, make sure your current allocation to stocks and bonds matches your risk tolerance and ideal retirement timing.

Also, do this if you’re in a target date fund, Wilson said. Target date funds are geared towards people retiring around a specific year – e.g. 2035 or 2040. As this target date approaches, the fund’s allocation becomes more conservative. But if you’re someone who started saving late and may need to take more risks to reach your retirement goals, he noted, your current closing fund may not offer you that.

Mark Struthers, a CFP at Sona Wealth Advisors in Minneapolis, works with 401(k) participants at organizations that hire his firm to provide financial wellness advice.

So he’s heard from people across the spectrum voicing concerns that they “can’t afford to lose” what they have. Even many educated investors wanted out during the downturn early in the pandemic, he said.

Struthers will advise them not to panic and remembering that downturns are the price investors pay for the high returns they earn during bull markets. But he knows that fear can overwhelm people. “You can’t just say ‘don’t sell,’ because that means losing some people and making them worse off.”

And it’s particularly disheartening for investors to see that bonds, designed to reduce the overall risk of their portfolio, are also down. “People Lose Faith” Struthers said.

Rather than trying to contradict her fears, he will try to get her to do something to allay her short-term concerns but cause the least amount of long-term damage to her nest egg.

For example, someone may be afraid to take enough risk on their 401(k) investments, especially in a falling market, for fear of losing more and having fewer financial resources if they are ever laid off.

So he reminds her of her existing assets for bad times, like her emergency fund and her disability insurance. He may then suggest that they continue to take on enough risk to generate the growth they need in their 401(k) for retirement, but redirect some of their new contributions into a cash value or low-risk investment. Or he may suggest diverting the money to a Roth IRA since those contributions can be accessed when needed without taxes or penalties. But it also means keeping the money in a retirement account in case the person doesn’t need it for emergencies.

“Just knowing that they have that consolation money there helps them not to panic,” Struthers said.

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