Market Volatility and Your 401(k): What to do During a Bear Market

Volatility is part of the stock market—and significant volatility can be influenced by factors outside investor control: trade wars, terrorist attacks, global pandemics, and other micro and macroeconomic situations to name just a few.

As a long-term investor saving for retirement, it can be confusing and even scary to see your portfolio performance and account balance change so drastically.

The key is to remain focused on your long-term goals and to make the best decisions aligned with those goals.

According to historical records, since its inception in 1926, the S&P 500 Index has enjoyed an average annual return of over 8 percent when adjusted for inflation. In other words, generally speaking, the stock market has experienced more good times than bad over the years.

And here’s some more good news: investing in the stock market is a long-term game, especially when you’re saving in a retirement plan, like a 401(k). However, there are some things you’ll want to do, and some things you’ll want to avoid, during periods of market volatility to protect your assets and keep your financial future secure.

How to react to a volatile stock market 

The stock market tends to reward those who keep calm in times of market downturns and maintain good decision-making.

In fact, staying the course is often a practical strategy. Unfortunately, many Americans don’t follow this important best practice when the market plummets. And when too many investors sell their assets in a panic, the market can get even worse—potentially leading to additional serious economic issues, like a recession or depression. 

Related: Three things to consider doing with your retirement plan during market volatility.

Remember that by saving for retirement in a 401(k) plan or similar investment-based account, you’re likely a long-term investor. As such, it’s important to keep the following long-term best practices in mind and avoid falling for short-term hysteria.

During market volatility, don’t panic

During periods of high volatility, stay calm, maintain good decision-making, and stay true to your long-term investment approach.

Selling your assets might seem like a clear decision to minimize future losses, but timing your re-entry into the market when it trends upward could be challenging. You could miss opportunities to make significant gains in your portfolio when the stock market experiences a large positive correction.

Think about it this way: when you’re saving for retirement, you’re in it for the long haul. If you sell your assets during a volatile market, you could potentially lock in your losses and not give your assets a chance to recover if the market improves. 

Amid stock market chaos, stick with your plan

If you have a retirement strategy in place, it’s often worth it to stay the course, even in times of a volatile market. If you don’t already have a plan or strategy in place, work with a financial advisor to develop one.

In general, for young investors with years ahead of them before they tap into retirement savings, this becomes especially true. Assets likely will have plenty of time to recover from the market downswing.

Instead of acting impulsively, review your savings strategy and remind yourself it’s normal for the stock market to experience times of growth and loss. That’s not to say you won’t be anxious or even scared when you see large, negative changes in your account balance. However, that’s the time it’s most important to follow your plan.

Related: How much should you save for retirement? Use this Monthly Living Expenses worksheet to get prepared.

Talk with your financial advisor about navigating market downturns

A trusted advisor can help you put together a retirement roadmap, help you create a written retirement strategy to follow, and help you stay on course for your retirement goals over the course of your career.

Equally important, they can help you align your investment portfolio with your risk tolerance. For example, if you are older or close to reaching retirement, you might want to expose your assets to less risk by using a more conservative approach. Or if you have many years until retirement, you might consider being more aggressive in your approach.

Remember, with an aggressive portfolio you might experience extensive volatility during a bear market. But, if you have time to recover before reaching retirement age, the risk may be worth the reward.

 

 

You might also be interested in: When saving for retirement, time makes all the difference

Common mistakes investors make during volatile markets

Many investors make mistakes during periods of market volatility, but you can avoid falling into the same traps.

Maintain good decision-making and remember that the stock market has always ebbed and flowed over time. Don’t let losses in your account send you into a panic; as the past consistently has proven, the stock market can recover from this.

Short-term volatility can be stressful, but you have resources that can help you. As always, talk with your financial advisor or contact us with any questions about your account.

Note: The information is provided solely for general educational and informational purposes. This should not be considered investment advice or investment recommendations.