Don’t do anything rash.
Amid the scary slide on Wall Street, that’s the advice from the professionals to 401(k) holders and other ordinary investors.
At times when the stock market’s movements are almost nauseating, they say the best course of action is: Sit tight. Even the most capable financial professionals, managing billions of dollars in assets, say they don’t know where this market is heading — and are staying put themselves.
“If you lived through the 2008, early-2009 debacle, which was horrible, you know that it can recover in a relatively short period of time,” said John Power, a financial planner at Power Plans in Walpole, Massachusetts.
The Dow Jones average fell 588 points Monday and shed over 200 more on Tuesday, after being up for most of the day.
Financial advisers emphasize that volatility is something investors need to get used to again. After a seven-year bull market, they have become complacent.
The stock market as of Monday entered into what’s known as a correction, or a drop of at least 10 percent from a recent high. But stock market corrections historically come every 18 months or so, and the last one in the U.S. was in 2011. So we were due for one.
It may be tempting to make drastic changes to your 401(k). But retirement investment plans are designed to build a return over several years, if not decades. So even in the aftermath of the worst weekly slump since 2011, dumping stocks now or pulling back on contributions to your plan is likely to hurt your prospects for higher retirement income in the long run, financial advisers say.
In fact, for everyone but those who are planning to retire in the next two or three years, the market decline could be a good opportunity to boost 401(k) contributions and get more for your money.
“Avoid making knee-jerk emotional reactions,” said David Shotwell, a certified financial planner at Rutter Baer in Lansing, Michigan. “That volatility that we face now is the price we pay to have better returns over time. And the ones that lose are the ones that get out at the wrong time, when things are low.”
For investors looking to retire within the next two or three years, resist the temptation to sell all your stocks in favor of bonds.
Let’s say you’re in your early 60s and planning to retire soon. You may have 30 years of retirement ahead of you. That means you’ll want to keep enough of your portfolio invested in riskier but higher-yielding assets like stocks, which give you a better chance of beating inflation over the long haul.
“The 401(k) is going to need to last a long time,” Power said. “You can’t afford to sell now and lose money, because it’s going to hurt you for the next 30 years.”
If investors feel the need to do something, it might be worthwhile to revisit the basics: Do you have the right mix of investments for your age? Are you appropriately diversified among small and large companies, U.S. and international, dividend-paying and growth?
Some 401(k) plans have built-in rebalancing, so there’s nothing for you to do. The mix of stocks and bonds is adjusted for you, by either a fund manager or a computer.
Moving to cash can feel good, but remember cash doesn’t earn anything. If the market falls some more, yes, you’re protected if you’ve cashed out some of your stocks. But if this correction comes and goes, which it will, you’ll miss out on those stock market gains.
History is a guide. Take the 2008 financial crisis and the ensuing stock market plunge in the first three months of 2009.
A snapshot of Fidelity Investments’ 401(k) accounts at the end of that quarter in 2009 shows their average balance at $46,200. Six years later, Fidelity Investments’ 401(k) accounts had an average balance of $91,800 as of the end of March — nearly double.
(AP)