It’s all about long-term growth
But while it’s certainly unsettling to see your 401(k) plan lose value, it’s important not to panic or make any rash decisions. Here’s why.
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The purpose of saving money in a 401(k) is to amass a retirement nest egg. Now, if you’re just a few years away from retirement, you’ll need to be careful about going too heavy on stocks in your portfolio. But if retirement is decades away, then a blip like the one many investors are experiencing now shouldn’t rattle you too much.
That’s why you shouldn’t let the recent volatility drive you to dump your stock investments. If you play it too safe in your 401(k), you might limit your savings’ growth over time, thereby resulting in an income shortfall by the time retirement rolls around. Instead, stay the course — especially if you’re years away from leaving the workforce.
The stock market is known to be volatile, and it’s known to go through periods where investment values decline to different degrees. And while it’s not fun to experience a downturn, it’s important to remember that if you’re saving for a milestone like retirement that’s 10, 20, or 30 years down the line, a brief dip in stock values isn’t something to get worked up about. In the long run, it will most likely end up being completely meaningless.
Make sure your investments are age-appropriate
While the recent volatility certainly shouldn’t prompt you to give up on the stock market, it may serve as a wake-up call to make sure your retirement portfolio is targeted to your age. If you’re not quite on the cusp of retirement but are getting closer, take a look at your assets and see how they’re allocated. If you’re heavily loaded with stocks, it may be time to start shifting toward bonds.
Meanwhile, if you expect to retire within the next couple of years, you’ll definitely want to shift at least 40% of your assets out of stocks and over to bonds. Entering retirement with a balanced portfolio is important, because if you start out too stock-heavy, you could end up locking in losses if the market tanks early on. It’s also important to make sure that you have plenty of cash on hand — at least a year’s worth — if retirement is very close. If that’s not the case, you may want to track your investments and liquidate some for cash at the right time.
Stay focused on the big picture Stock market downturns can be upsetting, even when they’re relatively short-lived. But remember, saving for retirement is a marathon, not a sprint, so try to keep temporary setbacks in perspective. And definitely don’t rush to rethink your stock investments if you’re not set to retire for many, many years. Stocks have a long history of rewarding investors who stick with them, and there’s no reason to think you won’t have a similar experience.