Retirement investing through 401(k) plan offers the inherent advantage of a reduced tax burden.
But in times of financial market volatility, your 401(k) may lose money if the stock markets are on a decline.
Here are a few proven tips on managing your 401(k) plan assets in a volatile market.
Stay consistent with your contributions
Economic downturns, high gas prices, inflation, and phases of excessive financial volatility are inevitable, but that should not deter you from continuing with your retirement account contributions.
You will ultimately retire from active, full-time work at some point, and 401(k) is a dependable way to save and invest for your retirement.
Social Security alone may not suffice to pay for your lifestyle during retirement.
When you stick consistently with your 401(k) savings plan through market ups and downs and continue to invest a significant part of your portfolio in stocks, regardless of the short-term market swings, over a long enough time period you are likely to achieve robust investing success.
Do not ignore the downside risks
It’s good to be optimistic with your 401(k) investments, but remain cognizant of the potential downsides of high-risk investing.
In good times, many people like to believe they have a great appetite for risk, but often their real risk-bearing capacity gets revealed only in the times of market pain.
If you are a relatively young investor, it may make sense to be more aggressive with your retirement investments because you still have decades to make up for any major losses.
But if you are nearing retirement, or you are in a situation where you might need to withdraw a substantial sum from your 401(k) within a year or two, you should be more circumspect about investing in stocks in a volatile market.
Rebalance your portfolio in volatile times
From a risk management perspective in uncertain economic conditions, rebalancing your 401(k) may be a good idea.
Carefully determine your targeted asset allocation, and then evaluate how you want to do the rebalancing.
In general, you can rebalance in two ways: (a) sell off a part of your existing investments to restore balance; or (b) redirect your future 401(k) contributions toward other investments.
For example, if you believe your 401(k) portfolio is overweighted in equities, you could sell off your stocks in one or more equity funds in a volatile market.
In addition, you could continue with your current portfolio allocation, but change your investment approach going forward. For instance, from an existing 75% stock allocation, you may readjust to 60% in stocks and redirect the difference toward bond funds.
Avoid the temptation of early withdrawals
Market volatility is generally accompanied by a climate of economic uncertainty, which creates challenges for many working people.
When financial tightness comes, it can be tempting to dip into your 401(k) savings. But remember, early withdrawals from account can prove to be costly.
If you withdraw money from it before the age of 59½, you will have to pay a 10% penalty and you will be liable to pay taxes on the sum you have withdrawn.
Moreover, you will lose the benefits of compounding. Early withdrawals will shrink your long-term retirement savings.