Many of us contribute to a 401(k) and are relying on it to support us in retirement, but do you know what investments make up your 401(k)? Do you know if your plan is set up to withstand the uncertainty of the market? Market fluctuations are an expected piece of the economic cycle, but when it comes to your retirement, the timing of when the market drops can matter more than how much it drops.
We are currently experiencing the second longest bull market since 1929. In this past year alone, the Dow Jones has seen all-time highs. After seven years and seven months, according to some measurements, many people wonder how much longer the market can climb before we enter a bear market.
It’s been less than a decade since the most recent financial crisis and it’s still fresh in investors’ minds, so it’s not surprising that people — particularly those close to retirement — are worried about the impact a market downturn may have on their 401(k). While there’s no predicting the markets, there are ways to position your 401(k) to make sure you’re prepared for a potential market downturn.
What Makes a 401(k) Unique?
A 401(k) plays an integral role in your financial planning and is different from your other accounts for a few reasons. First, you likely receive your 401(k) from an employer who may match contributions, encouraging you to contribute a larger percentage of your income. Also, you can choose how and where your money is invested, you can benefit from the after-tax contributions, and, at the maximum, you and your employer can contribute jointly up to $54,000 (for 2017) or $60,000 for those aged 50 or older.
However, a 401(k) does require maintenance. If the stock markets crash, you want to make sure your 401(k) is efficiently allocated. What can you do to prepare your 401(k) for this possible event?
What Not To Do
First, let’s start with what you shouldn’t do. One of the most important rules in investing is to avoid emotionally decisions. This is easier said than done considering how much stress and worry finances can cause. Multiple studies have analyzed how our emotions play into our investing results, especially when we chase above average returns. A 2015 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. Simply put, behavioral biases lead to poor investment decision-making.
You also don’t want to jump the gun and start making major changes to your account in anticipation of a downturn. Erring too much on the side of caution too many years ahead of retirement may prevent you from gaining the potential returns you need to retire on your terms. For example, some investors may panic, sell stocks, and go for less risky investments such as annuities, bonds, and cash.
What To Do
Despite market turmoil, you can feel confident in your financial strategy by being prepared and knowledgeable. Here’s how:
Build Your Foundation
Choosing the funds and amounts in your 401(k) can be confusing. You don’t want to pick them at random or settle on an investment out of confusion. While you can re-adjust your allocation in the future, it’s best to start the way you want to go. When setting up your account, take the time to speak with a financial professional who can help you determine your time horizon and risk tolerance. These two factors will drive your asset allocation, help you align your risk level to your situation, and strive to limit the downside to your comfort level.
Maintain a Long-Term Perspective
The markets are always changing. If you check your performance every time there’s a shift in the markets, you may feel constantly overwhelmed and stressed. Keep your eyes on the end goal and stay disciplined in your approach, especially if you’re more than 10 years away from retirement.
Keep Fees in Check
Should the market take a hit, you want to avoid losing as much as possible. One way to accomplish this is to keep your fees in check. Many plan participants don’t realize they are paying fees in their employee-sponsored retirement plans, such as administration fees, expenses charges, or investment management fees. Keep an eye out for hidden fees or high costs, as they can quickly eat away at your assets. Remember that gross return less costs equals net return.
Your portfolio should be reviewed annually to make sure it still reflects your appropriate level of risk. If it doesn’t, it may need to be rebalanced to keep your portfolio on the right track. Rebalancing consistently is one of the most proactive measures an investor can take to avoid feeling the burn of a market downturn. I like to meet with my clients at least once a year to review their portfolio and make adjustments as needed.
Knowledge is essential for making informed decisions. Avoid falling prey to the media hype, which tends to exaggerate. Instead, focus on the information you’ve learned from your financial professional and what you know about your personal risk tolerance and goals. If you’ve taken the time to follow through with the previously mentioned advice, you may not need to take action during a market slump and it may make more sense to stay the course.
Preparing Yourself and Your 401(k)
The only long-term guarantee in investing is that there will be short-term fluctuations. We’ll experience bear and bull markets in the decades ahead just as we have in the past. Rather than fear change, focus on preparing for it.
By using a disciplined approach, focusing on the long-term, and working with an objective advisor who understands investor behavior, you can keep your 401(k) on track and work toward your retirement goals. To learn more about your 401(k) and the factors that matter for your circumstances and needs, connect with me on LinkedIn, send me an email at firstname.lastname@example.org, or call my office at (612) 746-2272.
About Ernest Draper
Ernest Draper is a financial advisor with more than 18 years of experience in the financial services industry. Specializing in innovative investment strategies and wealth preservation products, he works with affluent professionals, executives, and business owners. Along with his many years of experience as an advisor, Ernest is also certified as a Chartered Life Underwriter®, Chartered Financial Consultant®, Chartered Advisor for Senior Living®, and CERTIFIED FINANCIAL PLANNER™ professional. With these designations, Ernest has the advanced training and knowledge to understand complex planning strategies and techniques facing many successful people and their families. Based in Minneapolis, he is licensed to work with clients in Minnesota, Illinois, Wisconsin, Maryland, Washington D.C., Missouri, Texas, and Connecticut. To learn more, connect with Ernest on LinkedIn, email him at email@example.com, or call his office at (612) 746-2272.
Ernest Draper, Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America ® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Foster Klima & Company, LLC is not an affiliate or subsidiary of PAS or Guardian.