No one wants to see the retirement savings they worked for take a severe hit when the markets go south. But markets do go down, sometimes pretty dramatically. The truth is that these downward movements are inevitable for long-term investors.
The key to handling volatility is to be smart about risk management, anticipating worst-case scenarios and adjusting your strategy to allow for them. That way, short-term market movements will not tempt you to make rash decisions about the investments available to you in your 401(k) account.
Retirement accounts, by definition, are designed to be long-term investments, allowing for the funds in your account to do the heavy lifting.
Here are a few steps to keep you on track when the market does take a turn:
- Do nothing. Often, the worst thing you can do is to sell out after a market crash, because the stock market can bounce back and leave you having sold out at the precise bottom of the market. Wait until you can consider your financial position objectively with as little emotion as possible.
- Assess the damage. See how your portfolio performed during the crash. If your overall account balance fell more than the overall market did, then you need to ask whether your portfolio was too aggressively positioned.
- Look more closely at the fund level. See whether the specific funds you own within the 401(k) had similar or disparate performance. Sometimes, you can identify poor fund choices by how they behave in a market crash.
- Reposition for your time horizon. In deciding whether to make changes, you will want to see how your asset mix compares with an ideal allocation for someone with your time horizon.
- Consider saving more. Use your contributions and paid out dividends to buy more funds when markets are dropping. The advantage of investing after a market crash is that your odds of immediate gains are better, and longer-term returns tend to improve as well.
Overall, the best thing you can do is remain calm and be mindful that the market ebbs and flows. Being prepared and save as much as possible to help you in the long run when you are facing a downturn in the market.
Shelton Capital Management has prepared a video on market stability in our educational video library. Check out that video and others on our page, 401(k) Educational Videos