Market sell-off: how falling stocks affect your 401(k)

Ideally, you don’t check your 401(k) balance every few hours. But if you’re alarmed by how your retirement savings are doing in today’s stock market, you’re not alone. You may even be wondering if it’s time to change your investment strategy.

Financial markets have suffered a massive sell-off in recent weeks. The S&P 500 – a benchmark commonly used to measure the overall stock market – is down about 19% for the year and plunged into bear market territory (down 20% from its previous all-time high) during of Friday’s session. Meanwhile, the Dow Jones Industrial Average is down 15% for the year, and the tech-heavy Nasdaq Composite is down 28% in 2022 as investors factor in interest rate hikes. of the Federal Reserve and ongoing geopolitical tensions.

Despite the volatility we’ve seen so far this year, retirement savers aren’t slowing down their 401(k) contributions. In fact, the percentage of a worker’s salary contributed to a 401(k), including employer and employee contributions, hit a new high of 14% in the first quarter of 2022, according to a recent report. Fidelity Investments report. Financial experts tend to recommend trying to get that figure up to 15%, so seeing the savings rate go up is a good thing.

While watching your 401(k) balance bounce in a volatile market can be scary, acting on that fear impulsively could hurt you in the long run.

“You want to make sure you don’t make any changes to your allocation that could potentially backfire,” says Mike Shamrell, vice president of thought leadership at Fidelity Investments.

Volatility is normal

The current market has been brutal for many retirement savers, but remember that volatility is part of investing. If you have a plan in place that matches your risk tolerance, goals, and timeline, you should be able to weather the current storm in the markets.

Financial advisers say it’s important not to make drastic changes to your retirement savings plan because it’s impossible to predict when market ups and downs will occur. While it is impossible to predict the performance of stocks on any given day or week, what we do know is that the best market days tend to occur right around the worst market days. For example, the S&P 500 was down 3.6% on April 29, which marked one of the worst days of the year for the index. But days later, on May 4, the index was up nearly 3% for one of its best days, according to data from JP Morgan Asset Management.

Because it is so difficult to time the market, experts tend to recommend dollar cost averaging, which is a strategy of investing modest amounts of money at regular intervals, such as $100 per month. .

If you regularly allocate a percentage of every paycheck to your 401(k), you’re already doing it, says Mindy Yu, chief investment officer at Betterment at Work, Betterment’s 401(k) company. And right now, with the price of many financial assets falling, it’s actually an opportune time to implement this strategy for many investors, because you can buy more stocks for less money, adds- she.

What falling stocks mean for young investors’ 401(k)s

While the current market volatility may shock younger investors, in particular — as they tend to have a higher stock allocation in their retirement accounts — Yu says it’s important for them to remember that they also have more time to recover from a market downturn.

“It won’t affect them as much over their longer time horizon,” she adds.

This is partly thanks to compound interest. This is the interest you earn on the initial amount you invested, plus interest on interest as that money accumulates over the years.

Here is an example of loyalty from the beginning of this year: a $10,000 investment that grows at the historical average return of the S&P 500 of about 9% per year and compounded annually could reach $15,386.24 in five years, $23,673.64 in 10 years , $56,044.11 in 20 years and $132,676.78 in 30 years.

But your money only has a chance to grow like this if you keep it invested. You don’t want to put your money aside – even if you’re scared – and miss out on that compound interest. Let your 401(k) do the work for you over the long haul.

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…And for investors with a shorter time horizon

When you’re approaching or in retirement, market downturns can be scary because you may already be relying on your 401(k) or soon will be.

Still, investors shouldn’t make changes to their 401(k)s based on short-term market events, says Mike Shamrell, vice president of thought leadership at Fidelity. Even if you’re approaching retirement age, you may need your savings to last for decades after you retire, he points out.

“You don’t want to be in a position where you pull back and get a little more conservative, then you risk missing out on potential gains if the market rebounds,” Shamrell says. “That’s why we encourage people to maintain their allowance and stay the course.”

That said, now might be a good time to review your allocations and make sure they’re still in line with your risk and time frame. Financial advisers tend to recommend that as investors approach retirement, they shift some of their allocations from risky investments, like stocks, to more conservative assets, like bonds.

The exact allocation will depend on your specific situation, but for investors 10 years or more from retirement, some experts recommend 85% to 95% in stocks and 10% to 15% in bonds, with this ratio rising to 70%. shares and 30% bonds for those between five and 10 years before retirement and 60% shares and 40% bonds for those who are retired or within five years of retirement.

Other advisers prefer a more conservative approach, with 30% or less equity when you’re less than 10 years from retirement, and reducing more as you get closer, as Money has previously reported.

Target date funds are often the default option for workers’ 401(k), for good reason. This type of fund gives you broad exposure to stocks and other asset classes, and also automatically rebalances over time to reduce your risk as you approach retirement – so your 401 ( k) already does much of the work for you.

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