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Is Your 401(k) Prepared for a Market Downturn?


We know that the markets are volatile, but investors and pundits alike are especially worried about what the near future holds. For one, we recently experienced an unpredictable presidential election after a significantly messy election season. Last year ended with moderately positive market returns, but now that a new president has been elected, many experts believe that these returns will slow down.

And then there’s the fact that we’re experiencing the second longest bull market since 1929. In this past year, the Dow Jones has neared all-time highs. At seven years and seven months, according to some measurements, many people wonder how much longer the market can climb before we enter a bear market.

It’s been less than a decade since the financial crisis hit, and it’s still fresh in investors’ minds. It’s not surprising that many of us, particularly those nearing retirement, are worried about the impact a market downturn may have on their 401(k). While there’s no predicting the markets, there are ways to position your 401(k) to make sure you’re prepared for a potential market downturn.

What Makes a 401(k) Unique?

A 401(k) plays a unique role in your financial planning and is different from other accounts for a few reasons. First, you likely receive your 401(k) from an employer who may match contributions, encouraging you to contribute a larger percentage of your income.  You can also choose how and where your money is invested, your contributions are made on an after-tax basis and, at the maximum, you and your employer can contribute jointly up to $54,000 (for 2017) or $60,000 for those aged 50 or older.

However, a 401(k) does require maintenance. If the stock markets crash, you want to make sure your 401(k) investments are allocated properly. So what can you do to protect your 401(k) in the event of a downturn?

What Should You Avoid?

First, let’s talk about what you shouldn’t do. One of the most important rules in investing is to refrain from making emotional decisions. Multiple studies have analyzed how our emotions affect our investing results, especially when we chase above average returns. A 2015 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. Simply put, behavioral biases lead to poor investment decision-making.

You also don’t want to start making major changes to your account in anticipation of a downturn. Erring too much on the side of caution too many years ahead of retirement may prevent you from gaining the potential returns you need to retire on your terms. For example, in a panic, some investors may sell stocks and pursue safer investments like annuities, bonds, and cash.

What Steps Should You Take?

If you want to feel confident during a time of market turmoil, be prepared and knowledgeable about how your 401(k) can handle market volatility. Here are a few ways you can accomplish this:

Start with a Firm Foundation

Choosing the funds and amounts in your 401(k) can be confusing. You don’t want to pick them at random or settle on an investment out of confusion. While you can re-adjust your allocation after the fact, it’s better to start off on the right foot. When you set up your account, take the time to speak with a financial professional who can help you determine your time horizon and risk tolerance. These two factors will drive your asset allocation, help you align your risk to your situation, and strive to limit the downside to your comfort level.

Have a Long-Term Perspective

The markets are always changing. If you check your portfolio performance every time there’s a shift in the markets, you will end up feeling overwhelmed and stressed. If you maintain a long-term perspective and stay disciplined in your approach, especially if you’re more than ten years away from retirement, you can feel confident in your plan.

Avoid High-Cost Investments

If the market takes a hit, the goal is to avoid losing as much as possible. One way to accomplish this goal is to keep your fees in check. Many plan participants don’t realize they are paying fees in their employee-sponsored retirement plans, such as administration fees, expenses charges, or investment management fees. Keep an eye out for hidden fees or high costs, as they can quickly eat away at your assets. Remember that gross return less costs equals net return.

Maintain Proper Asset Allocation

Your portfolio should be reviewed annually to ensure that it still reflects your appropriate level of risk. If it doesn’t, you may need to rebalance to keep your portfolio on the right track. Rebalancing consistently is one of the most proactive measures an investor can take to avoid feeling the burn of a market downturn. I like to meet with my clients at least once a year to review their portfolio and make adjustments as needed.

Know the Facts

Knowledge is essential for making informed decisions. Avoid falling prey to the media, which tends to exaggerate. Instead, stick to the information you’ve gleaned from your financial professional and what you know about your personal risk tolerance and goals. If you’ve taken the time to follow through with all of these steps, you may not need to take action during a market slump, and it may make more sense to stay the course.

Preparing Yourself and Your 401(k)

The only long-term guarantee in investing is that there will be short-term fluctuations. We’ll experience bear and bull markets in the decades ahead just as we have in the past decades. Rather than fear change, focus on preparing for it.

By using a disciplined approach, focusing on the long-term, and working with an objective advisor who understands investor behavior, you can keep your 401(k) on track and work toward your retirement goals. To learn more about your 401(k) and the factors that matter for your circumstances and needs, give me a call at (717) 283-4186 or email me at dniggel@keywealthpartners.com.

About David

David Niggel, CFP®, ChFC®, AIF® is the founder and president of Key Wealth Partners, LLC, an independent wealth management firm serving individuals, families, and business owners. Along with over a decade of financial services experience, he has advanced knowledge and training in providing holistic financial planning with fiduciary and ethical care, holding the CERTIFIED FINANCIAL PLANNER™, Chartered Financial Consultant®, and Accredited Investment Fiduciary® certifications. With hands-on entrepreneurial experience, he has the unique ability to help clients meet both their individual and business goals. Based in Lancaster, he serves clients through the York, Harrisburg, Hershey, and Central, Pennsylvania areas. Learn more by visiting www.keywealthpartners.com or connecting with David on LinkedIn.