How To Protect Your 401(k) from a Stock Market Crash

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A stock market crash is not uncommon, but how do you make sure it doesn’t completely wipe out your 401(k) savings? Here’s what you should to protect your 401(k) from a stock market crash and save your retirement funds.

How 401(k)s Are Affected by Stock Market Crashes

Retirement savings like 401(k) plans take a steep fall during stock market crashes, which causes a lot of fear and anxiety. However, don’t react out of uncertainty and panic sell.

Diversify Your Portfolio To Protect Your 401(k)

Since prevention is infinitely better than a cure for your savings, one of the best ways to protect your 401(k) plan from stock market crashes is to diversify your portfolio. Doing so minimizes risk in case one — or even two or three of your assets buckle under pressure.

With a diversified portfolio, you protect yourself from losing too much of your investment since you’re not tied to a single asset.

Which Assets Should You Add to Your Portfolio?

To diversify your portfolio, consider adding international investments, bonds, cash, stocks or cash equivalents. You can even go a different route altogether and invest in real estate.

By keeping your portfolio diverse, you have many opportunities to grow your retirement savings. Also, you can reduce the risk of having a drained account because of a volatile market.

Shift to More Conservative Investments

For some, shifting to more conservative investments like bonds, money market funds and target-date funds can save them from being impacted by a stock market crash.

For example, if you choose to invest in bonds, those may be safer than investing in something more volatile, like stocks. That’s because bonds have a fixed income, and you get the loan amount paid back once the bond reaches maturity.

When You Should Shift Your Investments

Ideally, it’s safe to have a few conservative investments when you’ve gotten to the middle of your career; that’s when protecting your assets becomes absolutely necessary.

Younger investors have a bit more room to take risks, as they generally have higher risk tolerance and more time to wait to recover losses. If that’s you, you should still take some precautions. Diversifying your portfolio is still a key strategy, no matter what stage of retirement planning you’re in.

Consider Rebalancing Your 401(k) Regularly

Managing your 401(k) asset portfolio is not a one-and-done deal. When you recognize opportunities or pitfalls, making changes by moving investments from one asset or sub-asset to another makes financial sense.

While you can do so twice annually, rebalancing your 401(k) at the end of every quarter isn’t a bad idea. This strategy keeps you ahead of the curve. It sharpens your financial senses, helping you identify potential risks or crashes before they happen.

What are the advantages of rebalancing before and after a market crash?

• It forms a routine, so rebalancing becomes a natural part of your investment strategy.
• Having non-volatile investments reduces risk in case of a market crash.
• Can lead to decisions that help preserve the assets you do have.
• Limits emotional and panic-driven decisions.
• Allows you to readjust funds after crashes to reflect the current market health.
• Locks in lower rates before a crash, which may preserve your assets after the crash ends.

Consider Using a 401(k) Rollover During a Market Crash

Another way to protect yourself from a market crash is to use a 401(k) rollover. A 401(k) rollover involves transferring your assets to another retirement plan or account.

For example, say you wish to transfer your funds from a 401(k) to an Individual Retirement Account. Doing so lets you customize your investments based on your current situation and risk tolerance, which may not be entirely possible with the former.

IRAs also generally have lower fees, allowing you to make more conservative investments.

Maintain a Long-Term Investment Strategy

It’s difficult to predict how you may act when a market crash hits, especially if you are new to a 401(k) plan or are closer to retirement.

Don’t Panic Sell

Never panic sell. This is the number one thing to remember. Panic selling makes a market downturn worse. It also doesn’t help your savings. You may drain your savings quickly if you make hasty decisions without thorough research.

When Did Panic Selling Happen After a Stock Market Crash?

One example is the COVID-19 pandemic, which erased $1.4 trillion from 401(k) accounts by the end of 2021 alone. These devastating dips also affected IRA account holders, who lost nearly $2 trillion in that same year.

What To Do Instead of Panic Selling

Try quarterly balancing. You’ll be more exposed to the ups and downs of the market. You’ll learn to sell what has grown too much and buy any stocks that have fallen behind. This is what keeps your portfolio in good shape.

Have a long-term investment strategy ready. When your decisions come from a sound mind and everything is more stable, you’re less likely to suffer from choices made when in terms of stress or uncertainty.

How To Avoid Common Mistakes During a Stock Market Crash

Anyone can make a mistake when faced with tremendous financial pressure. However, some errors are more common — and even more dangerous to your financial health than you think.

Think beyond the short term and immediate profit. What about the long-term? How can you preserve what you already have and grow that for years to come? This could be bonds, dividend stocks, ETFs and mutual funds or even real estate.

Short-term gains are risky and can have huge returns if all goes well. On the other hand, it can also hurt your bottom line if the market drops.

Final Thoughts: Protecting Your 401(k) for the Future

To protect your 401(k) during a stock market crash, resist the urge to panic sell. Don’t rely on your emotions. Instead, try a few smart strategies.

Diversify your portfolio and try quarterly rebalancing. Doing this may help reduce the impact of a crash on your financial situation and your account’s health.

There’s a lot at stake with your retirement savings. Always keep an eye on how your funds are performing. You don’t have to go it alone, either. Talk to a financial advisor about any concerns you might have. They can help you create a long-term strategy that adjusts to any ups and downs.

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