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

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

Shares and obligations are trading in bearish territory. And given the current circumstances, it’s fair to assume the markets will stay volatile for some time.

Interest rate are growing rapidly in the United States and Europe amid government efforts to curb runaway inflation. Recession fears stay. And a sharp drop in the pound coupled with rise in UK debt costs are a concern.

After being beaten in the first half of 2022, then regain some lost ground, actions are again deep in the red for the year, with the S&P 500 down more than 20% year-to-date. The S&P US Global Bond Index, meanwhile, is down about 14%.

And the investors can see lots 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 raise interest rates in its fight against inflation,” said Chris Zaccarelli. , Chief Investment Officer at Independent Advisor Alliance. “If you are considering buying stocks at this point, you will need to be patient and hold these positions for a much longer period than many people are used to – potentially two to three years, in some cases.”

Although the road is bumpy, here are some ways to mitigate potential damage to your long-term nest egg.

Bear markets can be a bear on your psyche. There may be times when you are tempted to sell your equity investments and transfer the proceeds to cash or a money market fund.

You will tell yourself that you will put the money back into stocks when things improve. But that will only lock in your losses.

If you’re a long-term investor — which includes people in their 60s and early 60s who may have been retired for 20 years or more — don’t expect to buck current downtrends.

When it comes to investing success, “it’s not about timing the market. It’s time to market,” said Taylor Wilson, 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 think things will never be good again. Focus on the things you can control and implement proven strategies will pay off over time.”

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

If you can convince yourself not to sell at a loss, you might still be tempted to stop making your regular contributions to your retirement savings plan for a while, thinking you’re just wasting money. ‘silver.

“It’s tough for a lot of people because the knee-jerk reaction is to stop contributing until the market recovers,” said CFP Sefa Mawuli of Pavlov Financial Planning in Arlington, Va.

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

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

Life happens. Plans change. The same goes for your time horizon until retirement. So make sure your current allocation to stocks and bonds matches your risk tolerance and your ideal retirement date.

Do this even if you’re in a target date fund, Wilson said. Target date funds are for people retiring around a certain year, for example, 2035 or 2040. The fund’s allocation will become more conservative as this target date approaches. But if you’re someone who started saving late and may need to take more risk to reach your retirement goals, he noted, your current target date fund may not offer you that.

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

So he’s heard from people across the spectrum who are expressing concerns that they “can’t afford to lose” what they have. Even many educated investors wanted to get out during the downturn at the start of the pandemic, he said.

Struthers will advise them not to panic and to remember that downturns are the price investors pay for the big returns they get during bull markets. But he knows that fear can take over people. “You can’t just say ‘don’t sell’ because you will lose some people and it will get worse.”

And it has been particularly discouraging for investors to see that bonds, which are supposed to reduce the overall risk of their portfolio, are also down. “People are losing faith” said Struthers.

So, instead of trying to contradict their fears, he will try to get them to do something to ease their short-term concerns, but do the least long-term damage to their nest egg.

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

So it reminds them of their bad weather assets, like their emergency fund and disability insurance. He may then suggest that they continue to take enough risk to generate the growth they need in their 401(k) for retirement, but redirect some of their new contributions to a cash equivalent or low-risk investment. Or he may suggest that they redirect the money to a Roth IRA, since those contributions can be accessed without tax or penalty if need be. But it also means keeping the money in a retirement account in case the person doesn’t need it in an emergency.

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

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