Unsettled by market volatility in your 401(k)?
It’s easy to forget that some of the stock funds in your 401(k) were up 30% or more last year when you wake up to financial news every day that the market is down yet again, and hear words like “bear” and “recession” show up in the media. We naturally recall what just happened best and, unfortunately, have an innate tendency to make decisions based on our recent memory. Not so great with investing, where the key is to not make decisions based on knee-jerk reactions and use a more measured approach.
The markets today are reacting to a combination of issues including the war in Ukraine, rising inflation, and the Fed’s efforts to contain it. Further, the market is likely to remain volatile as the Fed continues to raise rates in an effort to reign in inflation.
While market volatility is unsettling, it is not historically unusual. The key to weathering volatility is to make decisions utilizing a measured approach:
Make sure your portfolio allocation is suitable to YOU for your individual time horizon and personal risk tolerance. If you are not sure if you are appropriately allocated, call your 401(k) advisor or your personal financial planner if you have one.
Make sure you are well diversified and build in downside protection with asset classes like short-term bonds or even cash.
Rebalance and maintain this strategic allocation. Most 401(k) providers allow you to automatically rebalance your account. If you are in a target date fund, managed account, or model portfolio, this may already be done for you. Schedule a time with your 401(k) advisor to find out.
Avoid undue risk – your 401(k) is not the place to take bets on risky assets, or to put all of your money into the fund with the highest short-term historical performance. Go for quality – stick to higher quality bonds, use caution with riskier categories like high yield bonds.
Don’t try to time the markets. Time in the market is what matters and you want to still be buying when the market is down. Remember, buy low, sell high is the key to investing success.
Make a few measured decisions, hang in there and today’s market volatility will be just a blip on your retirement planning horizon.