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You’ve saved all your life to build up your 401(k) plan, and now in this period of stock market turbulence you’re worried about substantial losses. What can you do? You can’t control what happens in the stock market…[but] you can follow these simple tips to minimize your losses and maximize the chances that you’ll stay on track for a secure retirement.
This version of the original article by Mike Piershale (kiplinger.com) has been edited [ ] and abridged (…) to provide you with a faster and easier read. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
Tip #1: Diversify
…Increase the odds that your overall return will do better in a market drop than if you over-weighted in a small handful of investments that happened to fall hard and be sure to rebalance your portfolio once a year to bring the percentage of money invested in the different funds back in line with your original asset allocation. This will prevent overweighting in areas of the market that may do well for a while but then end up dropping, which could subject you to bigger losses.
Tip #2: Keep Contributing During Downturns
…Continue contributing on a monthly basis into your 401(k) plan even as the market is going down. This dollar cost averaging allows you to buy stocks at a cheaper price to compensate for some of the stocks that you may have bought at a higher price.
Tip #3: Know Your Risk Factor
Assess your risk tolerance, preferably before you start investing in your 401(k) plan….[and] Riskalyze, that can help you do this. For example,
- if the risk assessment shows you cannot tolerate more than a 10% drop in your portfolio, you can invest more heavily in bonds and cash equivalents and less in stock.
- If it still turns out your portfolio has fallen more than you can stomach, the best thing to do before you bail out, is to pause and think about it. Perhaps even talk to a friend with more experience investing in stock.
- If you do pull out near the bottom, you may miss the market recovery if history repeats itself and the market rebounds, which so far it always has.
Tip #4: Don’t Bet Too Much on Your Employer
…Do your homework and learn some things about your company’s financial condition before you buy company stock in your 401(k) and, even if you conclude that the company you work for is in good financial shape, it’s still a good practice to not put more than 5% or 10% of your 401(k) funds into your company stock.
Conclusion
Nothing in life is ever 100% certain, and that certainly includes investing in a 401(k) plan, but if you follow these time-tested principles of investing, the odds are you will be prepared for a comfortable retirement.
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