Will the stock market crash again in 2020? No one really knows, but a slight upheaval in the market in the coming months would not be so surprising. The coronavirus pandemic is worsening in the US, expanded unemployment benefits are about to expire, and some states are implementing mandatory business closings once again. All of these factors can affect investor sentiment, how the stock market moves, and ultimately your 401 (k) balance.
If that happens and your 401 (k) balance drops, here are three moves you can make to correct your course.
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1. Check the damage
Your first step is to review what happened. Take a deep breath, log into your 401 (k) website and assess the damage. Do some quick calculations to understand how much your balance has changed and which positions took the biggest hit. If you have positions that suffered individually greater losses than the stock market as a whole, see if you can get some takeout. For example, could high expense ratios be blamed for poor performance? Or did you invest in a specialized fund that was particularly affected?
Also look at the holdings of your funds and the composition of your assets. Perhaps your target date fund had a high percentage of stocks, even though you thought it was a fairly conservative position. Take note of anything that can help you choose better funds in the future.
Repeat that process for your toughest positions. Dive into its composition, expenses and investment style. Look at their longer-term performance before the collapse and see what conclusions you can draw about how different types of assets respond to changing market conditions.
2. Adjust your investment mix
Once you have reviewed how each fund contributed to your portfolio performance during the collapse, turn your attention to your investment mix. That is your lever to reduce risk and add stability. Simply reduce the percentage of each contribution that goes to your most volatile funds. Then, collect the slack by increasing the amount that is invested in its most stable positions. As your contributions are invested more conservatively, the risk in your portfolio will gradually decrease.
You could also sell some of your risky positions, but that is often not the right move after an accident. At that time, you will have the largest unrealized losses on your most aggressive funds. Sell them and block those losses and miss the opportunity to profit from a recovery in those positions.
3. Adjust your contributions
Then consider whether you need to adjust your contributions. If your specific retirement date is more than five years old and you are generally satisfied with your 401 (k) strategy, it is premature to make drastic changes. This crisis could have been a long time in three years, after all. If anything, you could increase your contributions to take advantage of lower stock prices after a collapse.
The future plan is more difficult to solve if he had planned to retire this year. Leaving your contributions as is gives you the best chance to participate in the recovery gains. But if the stock market goes into a prolonged recession with falling stock prices over time, you will need a different approach. You don’t want to invest, see that those investments lose value right away, and then you have to settle at a loss to take your retirement withdrawals. Avoid that scenario by saving to a cash account instead of your 401 (k). Then when it’s time to take retirement distributions, first withdraw from your cash account.
Whatever you do, don’t panic
If the market spirals downward, do your best to be methodical about impact review, gathering conclusions, and adjustments. Otherwise, you risk letting emotions guide your decision-making, and that usually leads you down the wrong path. If you feel panic increase, temporarily step away from your analysis.
It is useful to remember that throughout history, the market has always recovered from accidents. And when the market recovers, so will your 401 (k).
