For most people, their largest investment – other than their home – is their 401(k) plan. Naturally then, when the stock market begins to experience some volatility, as it has in recent weeks, people become a little skittish and nervous. For most people, their 401(k) is a vital component of their retirement plan and so when the market seems uncertain, there is a natural inclination to believe that the security of their retirement might be in jeopardy, and that can be cause for concern.
Part of what compounds this problem is the 24-hour cable news cycle. With their intense focus and relentless reporting, the news channels can make things seem worse than they are, and they can instill in their viewers a sense of alarm, and even panic. Viewers might come to believe that they have to take some kind of drastic action in response to market fluctuations and generally speaking, I do not think that is a wise course of action.
First, it’s important to note that what’s happening now in the market was not unexpected. The market has been on an upward swing for nearly nine years and some kind of course correction was imminent and anticipated. Historically speaking, these kinds of pullbacks are completely normal and so they should not be cause for alarm or panic.
Second, by many measures, the fundamentals of the U.S. economy seem sound. The Federal Reserve is still predicting robust growth this year; new jobs are still being created; wages are rising; and corporate earnings are stable. Given these factors, one can have confidence, I think, that the market will soon regain its stability and investors will continue to enjoy gains well above long-term historical averages.
So, the question that is on the minds of every holder of a 401(k) plan is – what, if anything, should I do now?
Hopefully, when your 401(k) was established, a well-thought out plan was also created that would chart your course toward a successful retirement. Depending on your age, your investor profile, and what your retirement goals might look like, a well-developed plan would usually adopt a longer-term perspective regarding your investment goals.
Such a plan would anticipate that there are going to be bumps in the road but over time, investments in equity stocks have had long term growth potential. So even though market instability can be gut-wrenching in the short-term, an experienced investor may hunker down and stay the course, especially as it pertains to their 401(k). That is not a short-term play; your 401(k) is an investment vehicle and a savings plan that is intended to prepare for your retirement over the long haul. Have confidence in that.
All investors have a relationship with risk. Some investors are naturally more speculative and risk tolerant; others are naturally more conservative and risk averse. These individual attributes tend to come to the fore in times of market instability.
For example, instead of being fearful about a downturn in the value of equity stocks, a naturally speculative and risk tolerant investor might see this as a buying opportunity. Rather than pulling their money out of the market, they might be inclined to put more money into the market, viewing the lower stock prices as an opportunity to buy at what they see as a discount.
On the other hand, more conservative and risk averse investors might be inclined to get out of the market altogether. They have little tolerance for instability and market swings, and their fear is that they might lose large chunks of money if the market should take a significant downturn.
However, savvy investors are aware that despite the recent losses, the overall market has gained substantially in the past year and over the past five years. These returns are well above historical averages.
So to answer the question about what to do now, consider remaining calm, don’t do anything impulsive or extreme, and be aware of the history of the markets. And this is especially prudent to consider when it comes to your 401(k).
Disclosure: Equity investing involves market risk, including possible loss of principal. All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. Past performance doesn’t guarantee future results. There are no investment strategies that guarantee a profit or protect against a loss. Investments seeking to achieve higher rates of return generally involve a higher degree of risk of principal. Consideration should be given to the possible loss of a part or all of principal invested.
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