How to Protect your 401(k) from a Downturn

While stomach-churning downturns are the nature of the market beast, don’t look at it as a core reason to cut back on your exposure to risk.  In fact, if you choose to leave the market during the tough times, and become a bit more conservative in your investing approach, you stand to miss the recovery rally that follows.

Remember, markets are resilient.

After every major downturn, markets have soared well above prior corrections.

A good way to determine how to allocate your investment is by using your age.  If you are in your 20s and 30s, the long-term growth potential of stocks significantly outweighs the risks.  In that case, it’s okay to have retirement assets with a larger concentration in stocks than bonds.

If you are in your 30s and 40s, advisors say it’s okay to keep as much as 80% of a 401(k) in equities, and up to 20% in bonds.  As you begin to approach 10 years until retirement, you can begin to reduce overall risk with 50% stocks and 50% bonds.

A few other pointers to protecting your 401(k) include the following:

Pointer No. 1 – Stress test your portfolio

“When stocks are at record highs, most investors get a false sense of their true risk tolerance, or ability to emotionally and financially deal with losses,” says USA Today. “The best way for investors to find out how big a market drop they handle is to envision how they would feel if the market tanked, says Susan Kaplan, president of Kaplan Financial Services.”

Pointer No. 2 – Make sure you’re well diversified

“Putting all your retirement money into a single stock or one type of investment vehicle is considered unwise. If that investment goes south, you could lose everything. In general, financial experts recommend buying a mix of assets, or diversifying, because it’s nearly impossible to predict when a single stock will take off … or fail,” says CBS News.

Pointer No. 3 – Rebalance your Portfolio

“Rebalancing is the sometimes painful process of selling assets that have appreciated and buying ones that have fallen in value. It forces investors to sell high and buy low,” says CNBC.  “You don’t have to rebalance after every market gyration. Vanguard found that investors who wait to rebalance until their portfolios were 10 percentage points off target produced better long-term results than shifting the investment mix more often.”

And, according to the Bank of America:

“Consistently rebalancing your portfolio can help protect you from trading based on emotions,” says Liersch. Rebalancing is about keeping your eye on the big picture — your goals, your tolerance for risk, your investment time horizon and your liquidity needs — and not being seduced or scared off by the swings of the financial markets.

Again, it’s always in your best interest to check with your advisor that may know your financial situation a lot better.  These are just some things to keep in mind.

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