Watching your 401(k) account balance decline can be frustrating and terrifying. You may feel anxious and resentful about the decisions you’ve made, the state of the world, and your ability to achieve your long-term goals.
Is this normal?
Stocks lose money every year
Although markets have generally risen over time, stocks lose money almost every year – at least temporarily.
Since 1979, the U.S. stock market has declined from its yearly highs by an average of about 14% each year. However, the market ended the year with positive returns in about 83% of those years. Temporary losses in the stock market are an unpleasant aspect of growth investing, but a decline doesn’t necessarily mean that your investment goals have been shattered.
Should I sell my investments when my 401(k) loses money?
If you sell your losing investments and switch to safer investments, you may miss out on a recovery opportunity (if history repeats itself) and lock in your losses. Additionally, you’ll need to determine when you want to return to investing. It’s a tough position – you may never feel fully confident about investing, and by the time you feel that “everything is clear,” you might have missed a significant recovery opportunity.
It’s usually best to make changes to your portfolio only when your goals or circumstances change. If you’re currently invested in a well-diversified portfolio that you’ve chosen based on your long-term needs, it’s often wise to ignore market fluctuations (unless your needs change). Of course, this is easier said than done.
Note: It’s impossible to know if you should sell now or try to ride out market volatility. For this reason, it’s usually best to make investment decisions based on your timeline and risk tolerance.
Tips for Long-Term Investors
Review your risk level
Review your investments to see if you are taking on the appropriate level of risk. Your risk level relates to how much loss you can handle and how much time you have until retirement. If you’re investing well outside your comfort zone, you may find it hard to handle market losses. If retirement is just a few years away, your portfolio doesn’t have much time to recover.
The first step is to complete a risk tolerance questionnaire, either online or through a financial advisor. They may provide recommendations on investment strategies that might be suitable for you. You don’t have to follow the recommendations to the letter, but going through the exercise can provide insight into your behaviors and investment needs.
Make sure to diversify
If you’re heavily invested in only one or two investment categories, you may experience more volatility compared to spreading your money more broadly. For example, if you’re only investing in mutual funds with large U.S. companies, you might benefit from exposure to both large and small companies, both inside and outside the U.S. Different types of bond holdings can also provide stability (and potential returns). A solid mix of bond holdings might include U.S. and foreign government bonds, corporate bonds, and other fixed-income strategies.
Diversification is based on the following idea: during any given year, some investments lose more than others – and some types of investment might rise, offsetting your losses. For example, in 2008, investors in stocks lost more than 30% (much more in some sectors). However, U.S. fixed income holdings achieved gains of 5.24%. Then in 2013, “safe” fixed-income holdings lost about 2%, while investors in U.S. stocks gained more than 30%. The point is that a diversified portfolio can weather downturns better than others.
Note:
If you need help building a diversified portfolio with an appropriate level of risk, seek assistance from your 401(k) provider or a fee-only financial advisor. You don’t have to do this all on your own.
Fee Check
If you are investing in a money market fund or a fixed account and are still losing money, the fees may be the reason. 401(k) plans often charge fees on your account balance that cover items like plan management and record-keeping. The question is whether those fees are reasonable.
Unfortunately, as an employee, you don’t have much control over the fee structure of your retirement plan. However, you may have some control over other fees you pay. If your plan offers it, you can choose passive investments, also known as index funds, instead of actively managed funds that tend to have higher fees.
If you are concerned about fees, bring it up with your employer. Employers need to be aware of fees and ensure that any costs you pay are reasonable.
Looking to the Future
Now that you know that market downturns are normal (and usually temporary), how should you respond? It largely depends on whether you can tolerate the discomfort of seeing losses in your account. If not, it’s a sign that you might want to adjust the risk level in your portfolio. In many cases, it is beneficial to ride out these periods and wait for the markets to recover.
Note: “Don’t just stand there, do something!” In many emergencies, this is good advice. But when the stock markets get volatile, the opposite may be best: “Don’t do anything, just stand there!”
It may seem that taking action restores a sense of control, but the markets are beyond anyone’s control. The best you can do is choose an investment mix that aligns with your long-term goals and expect these occurrences to happen regularly.
Frequently Asked Questions (FAQs)
What’s the difference between a bear market and a recession?
A bear market and a recession can occur simultaneously, but they measure different things. A bear market refers specifically to securities prices, while a recession refers to the state of the economy as a whole, relying on larger indicators like GDP.
Should I switch my 401(k) account in preparation for a bear market?
Within your 401(k) plan, you may have several ways to diversify your investments. Asset allocation funds can handle most of the hard work for you. These vehicles invest in multiple different areas, and your job is usually just to choose one. Funds may even have easily understandable names like “Conservative Growth Fund” or “Aggressive Growth Fund.” However, it’s best to examine the underlying assets to understand how each fund works.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Dimensional. “Recent Market Volatility.”
The Hartford. “10 Things You Should Know About Bear Markets.”
Edward Jones. “Investing Through Recessions and Recoveries: Lessons From History.”
Callan Institute. “The Callan Periodic Table of Investment Returns.”
Source: https://www.thebalancemoney.com/my-401-k-is-losing-money-what-now-5088756
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