How to Invest a 401K During Bad Times in the Stock Market
While a 401k plan generally offers excellent diversification, in bad markets it can seem like everything is trading down and your diversification isn’t helping. At times like these, it’s tempting to make drastic changes in your asset allocation, hoping to avoid further damage.
However, it’s difficult for even seasoned investors to time the market correctly–to get out before the market goes down and to get back in before it rises. Usually, it’s better to stick with your investment strategy and let the markets take care of themselves.
A 401k is meant to be a long-term investment account. You are not required to take distributions from your 401k until you are over 70 1/2 years old (although you may begin distributions as early as 59 1/2). While it is hard to imagine the market ever going up when it drops dramatically, history has shown that over time, markets do recover.
If you have 30, 20 or even just 10 years left until you begin withdrawing from your 401k, you have time for your investments to recover. Think of it this way–if the market reverts to its average long-term return of approximately 10 percent per year, your investments should double every seven years or so. When you have time on your side, you should stick to your investment plan and let the markets naturally recover.
Add to Your Investment
While psychologically we would all love the stock market to rise every day, in reality, our investments are better served when we are able to take advantage of lower prices. If you believe that the long-term prospects for the market are up–and if you invested in stock funds in your 401k, you did believe that, at least at one point–then you should relish the chance to buy stocks when they are “on sale.”
There’s no doubt it takes emotional fortitude to buy stocks when everyone else is selling, but if you have a long-term investment horizon, there is no better strategy. For some reason, many investors wait until market prices begin to rise before they invest more–by definition, they will be paying higher prices for the same stocks than you will. Give your retirement investments a leg up by purchasing more when prices are cheaper.
Ask for Help
Even if you think you don’t need investment help, it is only human to need emotional support during a severe market downturn. Find an adviser, or someone whose investment advice you trust, and lean on him for words of encouragement. Things truly look bleak in the midst of a market selloff, but investors and advisers who have been through bad markets before understand that both good markets and bad markets eventually have an end, and that staying active and engaged during the rough periods makes for better ultimate investment returns.
If you truly cannot sleep at night worrying about your investments, move your assets to a more conservative allocation. One of the true benefits of a 401k plan is easy access to a multitude of varied investment styles, and with one phone call, you can step out of harm’s way and rest easier. Remember to keep a sharp eye out for opportunity, however, and when the markets are acting better, make sure you return to your long-term asset allocation. While your long-term financial health is important, your near-term physical health, if impaired, should be tended to first.