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

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

stock and bonds It is trading in the bear area. Given the current circumstances, it is fair to assume The markets will stay volatile for a while.

interest rates rising rapidly in the United States and Europe Amid government efforts to curb rampant inflation. Recession fears Remains. A sharp decline in the British pound is associated with it UK debt rises The costs are cause for concern.

After being beaten in the first half of 2022, then recover some lost land, Stores Once again in the red for the year, with the S&P 500 down more than 20% since the start of the year. Meanwhile, the US S&P Total Bond Index is down about 14%.

and investors can see Much more over the next year.

“Markets are likely to be volatile – up and down – over the next six to twelve months as the Federal Reserve continues to raise interest rates in its fight against inflation,” said Chris Zacarelli, CIO, CIA. “If you’re planning to buy stocks at this point, you’ll need to be patient and hold these 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 ahead, here are some ways to mitigate potential long-term nest egg damage.

Bear markets can affect your psyche. There may be times when you are tempted to sell your stock investment and turn the proceeds into cash or a money market fund.

You will tell yourself that you will return the money to the stock when things get better. But doing so will only insure your losses.

If you’re a long-term investor – including those in their 60s and early 70s who may retire for 20 years or more – don’t expect to outpace current downtrends.

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

Suppose you invested $10,000 at the beginning of 1981 in the S&P 500. That money would have increased to nearly $1.1 million by March 31, 2021, according to Fidelity Management & Research. But if you missed the top five trading days during those 40 years, it would have only grown to nearly $676,000. And if you sat in the top 30 days, your $10,000 could grow to just $177,000.

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

“This is difficult for a lot of people, because the quick 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. Continuing to contribute during lower markets allows investors to buy assets at cheaper rates, which may help your account recover faster after a market downturn.”

If you can swing financially, Wilson recommends increasing your contributions if you haven’t already maxed out. Besides the value of buying more at a discount, he said taking a positive step can ease the anxiety that can come from watching the nest egg shrink (temporarily).

life happens. Plans change. So might your time horizon until retirement. So check to see that your current allocation to stocks and bonds matches your risk tolerance and ideal retirement date.

Do this even if you’re in the target date box, Wilson said. Target date money is directed toward people who retire around a certain year—say, 2035 or 2040. The fund’s allocations will increase more conservatively as that target date approaches. But if you’re someone who started saving late and may need to take more risk to achieve your retirement goals, he indicated that your current target date fund may not offer that for you.

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

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

Struthers will advise them not to panic And remember, downturns are the price investors pay for the high returns they get during bull markets. But he knows that fear can triumph over people. “You can’t say ‘don’t sell’ just because you’re going to lose some people and they’ll be worse off.”

And it was particularly disappointing to investors to see that the bonds, which are supposed to reduce the overall risk of their portfolios, also fell. “People lose their faith” Struthers said.

So instead of trying to oppose their fears, he will try to persuade them to do something to calm their short-term fears, but do the least long-term damage to their nest eggs.

For example, someone might be afraid to risk enough in their 401(k) investment, especially in a bear market, because they fear losing more and getting less money if they are laid off.

So it reminds them of their rainy current assets, like an emergency fund and disability insurance. He might then suggest that they continue to take enough risk to achieve the growth they need in their 401(k) for retirement, but that they redirect a portion of their new contributions to a cash equivalent investment or a low-risk investment. Or he might suggest that they redirect the money to a Roth IRA, where these contributions can be accessed without tax or penalty if necessary. But it also keeps the money in a retirement account in case you don’t need it in an emergency.

“Just knowing they have the comfortable money there helps them panic,” Struthers said.