If you’ve kept an eye on the markets at all this year, you know that it’s been one of record highs. In October, the Dow closed above 23,000 for the first time, and in September, the S&P 500 finally broke the 2,500 mark. And then there’s the fact that we’re experiencing the second longest bull market since 1929. At eight and a half years, many people wonder how much longer the market can climb before we enter a bear market.
It’s been less than a decade since the financial crisis hit, and the devastating losses are still fresh in many investors’ minds. It’s not surprising that many of us, particularly those nearing retirement, are worried about the impact a market downturn may have on their 401(k). It’s easy to get excited and comfortable while the markets are soaring and returns are rolling in, but what goes up must come down.
What Makes a 401(k) Unique?
A 401(k) plays a unique role in your financial planning and is different from other accounts in a few ways. First, you likely receive your 401(k) from an employer who may match contributions, encouraging you to contribute a larger percentage of your income. You can also choose how and where your money is invested, your contributions are made on an after-tax basis and, at the maximum, you and your employer can contribute jointly up to $54,000 (for 2017) or $60,000 for those aged 50 or older.
However, a 401(k) does require maintenance. If the stock markets crash, you want to make sure your 401(k) investments are allocated properly. So what can you do to protect your 401(k) in the event of a downturn?
Avoid Emotional Investing
First, let’s talk about what you shouldn’t do. One of the most important rules in investing is to refrain from making emotional decisions. Multiple studies have analyzed how our emotions affect our investing results, especially when we chase above average returns. A 2015 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. Simply put, behavioral biases lead to poor investment decision-making.
You also don’t want to start making major changes to your account in anticipation of a downturn. Erring too much on the side of caution too many years ahead of retirement may prevent you from gaining the potential returns you need to retire on your terms. For example, in a panic, some investors may sell stocks and pursue safer investments like annuities, bonds, and cash.
Adhere To Time-Tested Principles
If you want to feel confident during a time of market turmoil, be prepared and knowledgeable about how your 401(k) can handle market volatility. Here are a few ways you can accomplish this:
Start with a Firm Foundation
Choosing the funds and amounts in your 401(k) can be confusing. You don’t want to pick them at random or settle on an investment out of confusion. While you can re-adjust your allocation after the fact, it’s better to start off on the right foot. When you set up your account, take the time to speak with a financial professional who can help you determine your time horizon and risk tolerance. These two factors will drive your asset allocation, help you align your risk to your situation, and strive to limit the downside to your comfort level.
Have a Long-Term Perspective
The markets are always changing. If you check your portfolio performance every time there’s a shift in the markets, you will end up feeling overwhelmed and stressed. If you maintain a long-term perspective and stay disciplined in your approach, especially if you’re more than ten years away from retirement, you can feel confident in your plan.
Maintain Proper Asset Allocation
Your portfolio should be reviewed annually to ensure that it still reflects your appropriate level of risk. If it doesn’t, you may need to rebalance to keep your portfolio on the right track. Rebalancing consistently is one of the most proactive measures an investor can take to avoid feeling the burn of a market downturn. I like to meet with my clients at least once a year to review their portfolio and make adjustments as needed.
Know the Facts
Knowledge is essential for making informed decisions. Avoid falling prey to the media, which tends to exaggerate. Instead, stick to the information you’ve gleaned from your financial professional and what you know about your personal risk tolerance and goals. If you’ve taken the time to follow through with all of these steps, you may not need to take action during a market slump, and it may make more sense to stay the course.
Prepare Yourself And Your 401(k)
The only long-term guarantee in investing is that there will be short-term fluctuations. We’ll experience bear and bull markets in the decades ahead just as we have in the past decades. Rather than fear change, focus on preparing for it.
By using a disciplined approach, focusing on the long-term, and working with an objective advisor who understands investor behavior, you can keep your 401(k) on track and work toward your retirement goals. To learn more about your 401(k) and the factors that matter for your circumstances and needs, give me a call at 616-396-0500 or email email@example.com.
Joel Johnson, AIF® is an Investment Advisor Representative with DeLong & Brower, P. C., a Holland, Michigan accounting, retirement consulting, insurance, and financial services firm. He specializes in providing comprehensive wealth management and retirement plan consulting for individuals, families, retirees, and business owners. Along with more than 15 years of industry experience, Joel is an Accredited Investment Fiduciary®, a Chartered Federal Employee Benefit Consultant, and a Certified Business Adviser/Consultant through Crown Business and Crown Financial Ministry. To learn more, visit www.cpaholland.com.