Congrats, Your 401(k) Is Up: Now Don’t Make These 5 Costly Mistakes

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After a rough 2022, in which the S&P 500 index lost nearly 20% of its value, stocks rebounded nicely in 2023, posting a gain of over 24%. If you’ve stuck with your 401(k) investments — and even added some during the down year — congratulations! You’re likely to feel good about the strong rebound in your account value.

But just like investors can make bad moves when the market is low, they can hurt their accounts by making changes when values are up. If you’re looking at big gains in your 401(k) plan and are thinking of making changes, these are the costly mistakes you should be sure to avoid. 

Withdraw Your Gains

Withdrawing your 401(k) gains could be the single most damaging thing you could do to your retirement security. Not only will money you take out of your account be unavailable for your retirement, but you’ll pay ordinary tax on any money you take out. Even if you qualify for a hardship distribution, with some limited exceptions, you’ll also pay the 10% early withdrawal penalty if you’re still under 59 ½.

Stop Contributing

While not as bad as taking an early withdrawal, stopping your 401(k) contributions is another bad choice after your portfolio rises in value. For one thing, markets making new highs tend to keep moving higher, so you may be missing out on additional gains by not contributing regularly.

If markets do actually turn around and go lower — which is what many investors fear when values are high — it’s even more of a reason to continue contributing, picking up additional shares as prices fall.

The most important thing to remember when it comes to investing for the long run is that compounding provides your biggest gains, and they take time to materialize. If you were to invest regularly over 30 years, for example, you’d earn the vast majority of your gains in the final 10 years, not the first 20. Slowing down your contribution rate at any time reduces the compounding effect in your account, as you’ll have less money there to grow.

Take Out a Loan

When homeowners see the value of their equity rise, many take out a home equity loan to help pay off other expenses. While you might be tempted to take a similar action with your 401(k), that would be a mistake.

For one thing, you’ll pay interest on any 401(k) loan you take out. More importantly, money you borrow from your 401(k) plan actually comes directly out of your account, meaning it doesn’t have the chance to grow and compound in value. While you do pay the interest on a 401(k) loan back to your own account, you’re still adding an interest expense to your monthly budget, which is counter-productive when you’re trying to build long-term wealth.

Getting More Aggressive

While you don’t want to stop making 401(k) investments if your value is up, you also don’t want to go to the other extreme by becoming more aggressive. Your 401(k) investment strategy should be based on the financial objectives and risk tolerance you determined when you started. It should not change just because your account value is up or down.

While markets provide consistent long-term returns, short-term returns can be extremely variable. If you make everything in your account ultra-aggressive right before a bear market, it can take you years to get back to where you started.

Day Trading Investments

Some investors fall victim to the belief that when their account values are up, they are somehow smarter than the market. This can lead to overconfidence and overtrading, both of which can hurt long-term performance.

If, when your account value is up, you feel like it’s a sign that you should start trading more, take a step back and remove your emotions from the equation. Remember that “a rising tide lifts all boats,” and that thinking you can successfully day trade just because your account is up is more likely to hurt than help your 401(k) value.

Sticking to a consistent, long-term investment program offers the best chance for success in your 401(k).

The Bottom Line

Warren Buffett, the billionaire CEO known as the “Oracle of Omaha,” once said, “You only have to do a very few things right in your life, so long as you don’t do too many things wrong.”

This definitely applies to contributing to a 401(k) plan. If you can simply design a regular investment plan and stick to it — without making any of these costly mistakes — you’re likely to succeed, as Buffett suggests.

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