Thursday’s plunge of nearly 460 points in the Dow Jones Industrial Average sent stocks back into a bear market and left investors once again wondering how to navigate the financial waters — including those who have 401(k)s and other retirement accounts.
As CNN reported, the Dow fell more than 20% below the all-time high it set in January, putting it into bear territory. Meanwhile, the S&P 500 dropped 2.1% on Thursday and the Nasdaq Composite declined 2.8% amid a whole bucketful of worries, ranging from inflation and interest-rate hikes to rising bond yields and the threat of an upcoming recession.
For those with 401(k) accounts, the shaky stock market means coming up with a strategy to minimize your losses. Your personal strategy depends in part on your financial situation, according to an AARP blog this week from financial writer John Waggoner.
He noted that the average bear market recovers in three-and-a-half years, meaning that younger investors have plenty of time to ride out the storm.
“If you’re 50 years old and plan to retire in 15 years, your best bet may be to keep socking away money in your 401(k) or IRA in the same proportions as you have been,” Waggoner wrote. “If you invest regularly, you hope to be buying stock at progressively lower prices. That’s a good thing: You want to buy low now and sell high later.”
On the other hand, if you are already retired, Waggoner advises against taking withdrawals from your stock funds in a bear market unless there’s no other choice.
“You won’t have income to cover your losses,” Waggoner wrote. “And if your stock fund is down 15% and you withdraw 4%, your account will be down 19%. Withdrawals in a bear market just make things worse.”
Another thing you should avoid is trying to time the market by selling your stocks now and then attempting to guess when things have bottomed out so you can buy again.
“It’s not about timing the market — it’s about time in the market,” Taylor Wilson, a certified financial planner and president of Greenstone Wealth Management in Forest City, Iowa, told CNN. “During bull markets people tend to think the good times will never end and during bear markets they think that things will never be good again. Concentrating on things you can control and implementing proven strategies will pay off over time.”
Many investors might also be tempted to cut back on contributions to their 401(k) plans until the stock markets correct themselves. This is another mistake, experts say.
“The knee-jerk reaction is to stop contributing until the market recovers,” Sefa Mawuli, a CFP at Pavlov Financial Planning in Arlington, Virginia, told CNN. “But the key to 401(k) success is consistent and ongoing contributions. Continuing to contribute during down markets allows investors to buy assets at cheaper prices, which may help your account recover faster after a market downturn.”
She even recommends boosting your contributions if you haven’t already maxed them out. Not only will you get stocks at a discount, but you also get the psychological benefit of taking a positive step even as your 401(k) temporarily shrinks.
Finally, you should use the bear market to reassess your investment allocation to make sure you have the right mix of stocks and bonds to match your risk tolerance and ideal retirement date.
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