What to do when your 401(k) loses value

13 MIN READEditorial Policy

Your 401(k): It’s your hard-earned money. The nest egg you’re trying to grow so you can live off of it during retirement. But the market turbulence is dragging down your account balance. Now what? 

The short answer: Do nothing*

But doing nothing isn’t always easy. Especially if you check your account during a market event, and find that your balance has taken a hit. In that situation, it’s common to feel anxious. But feelings of anxiety aren’t what you want driving your financial decisions. It’s important to rationally assess the situation.

Let’s zoom out: While short-term events can make for market turmoil taking a longer view yields a different perspective. Here’s a look at the S&P over a 40-year period, and you can see that it’s trended up and to the right even through turbulent times, including price declines following 9/11, the 2008 Financial Crisis, and Brexit.

S&P over 40 years: 1980-2020

Now faced with growing concerns about the global spread of Coronavirus, markets are once again turbulent. If history repeats itself, in time the market will show resiliency and prices will restabilize. (We’ll be keeping an eye on what this will look like over the coming weeks.)

Taking the long view

The overwhelming advice from financial experts and researchers is to do nothing when faced with global events that impact the market. For many people, they say, leaving their money in retirement accounts and continuing to make contributions, as usual, is the best course of action.

Since World War II, there have been 12 twelve bear markets, lasting 14.5 months on average. In contrast, your 401(k) is for your retirement. A milestone that, for most, is probably longer than a year or so in the future.

Depending on how old you are and when you plan to retire, your 401(k) is an investment that you’ll be growing over a 20-year, 30-year, or even 40-year period. You should match your investments to your future, long-term goals rather than the economic environment. If your retirement is coming up sooner than that, it’s common for people to start shifting their portfolio to hold a larger portion of their nest egg in investments that aren’t as likely to be affected ups and downs in the market.

How can Human Interest help?

The Human Interest platform equips customers with technology aimed at reducing reduce the risk of negative effects in a market downturn:

  • Automatic investing with diversification: The automated investing service makes investing decisions for you and maintains an optimal strategy even through times that may encourage non-rational, i.e. emotional, decision making. See our standard investment lineup here.

  • Automatic rebalancing: We offer an algorithm-based automatic rebalancing tool that customers can turn on to help them keep risk in check and can potentially enhance returns. This tool automates the periodic buying and selling of investments and realigning a portfolio to a specific target, i.e., the portion of stocks.

Should I take out my money?

Not likely. There are rare times when other expenses take priority and withdrawing money from a retirement account may be what’s needed — but this is rare. Taking money out of a 401(k) is usually not the most cost-effective way to get access to funds. For example, there are typically significant tax penalties for pulling funds out before age 59 ½, including a 10% early withdrawal penalty AND income taxes (with a few exceptions). Be sure to consider options before making a serious decision that could affect your nest egg.

If doing nothing doesn’t seem like enough, consider the following.

Lessons from recent years: Brexit and the 2016 election

If you had decided to cash out your holdings on any funds tracking these benchmarks after the Brexit referendum results were announced and there was a slight dip in the market, you would have missed out on the subsequent upswing and those investment returns. It’s interesting to note that the IMF and other think tanks expected the U.K.’s economic growth to slow down in 2017, but the performance of the U.K. stock market in the months after Brexit showed that holding on to your investments in a post-Brexit world would have been a savvy decision.

A similar scenario, though to a smaller degree, happened in 2016 upon the election of Donald Trump. Markets don’t like surprises, and given this political upset, many people considered selling U.S. stock and investing more heavily in international stocks, or just fiddling with their investments in the light of potential economic uncertainty. In late 2018, we can look back and say this barely turned out to be a blip in the market — it wasn’t even significant enough to warrant a labeled arrow in our chart above.

Reevaluate your investments and goals

Regular check-ins are a good idea regardless of your portfolio’s performance, but seeing your account’s balance lower than you’d like could give you an extra push to reevaluate your investments and financial goals.

Continuing to make the same contributions during market down and upswings is a strategy called dollar-cost averaging, and it can help minimize the risk that comes with trying to time the market.

You may be able to consult an advisor, either within your company or one that’s associated with the 401(k) management company. Or, you could pay an independent advisor to look over your investments and options (make absolutely sure that they’re a fiduciary!). Because of changes in the funds’ values, your age, or goals, you may want to make changes to your investments. This could involve changing your allocations with the investments you already hold or exploring entirely new strategies. An advisor, or the 401(k) manager, can help you take action with these.

If you are selectively trying to suss out some sort of pattern (domestic funds, tech funds, etc.) and trying to game the market by changing how your contributions are being allocated, here is some recommended reading: Should You Really “Invest In What You Know”?

Should you increase your 401(k) contributions during a market downturn?

This might not be palatable for conservative investors, while others may see downturns as great opportunities, particularly for those that are saving for a retirement that’s decades away. 

Many investors choose to stop contributing to their retirement investments until “things get better.” By definition, when “things get better”, prices will be higher. Waiting until prices rise again to invest more heavily doesn’t make sense because you can buy the same assets while they’re “on sale” now.

Does it ever make sense to stop making contributions or withdraw money?

Deciding to stop making contributions based solely on the market conditions isn’t often a good idea, but there are times when other expenses take priority. Make sure you compare the pros and cons of each option you have. For example, if you’re having trouble meeting minimal needs, such as paying rent or buying groceries, it might be a good time to limit your contributions. You certainly shouldn’t be racking up credit card or any high-interest debt just to contribute to your 401(k), either.

If you have money in a 401(k) from a previous employer, you can withdraw it, but you’ll have to pay income taxes plus a 10% penalty. You’ll also lock in your losses and lose the opportunity for growth in the future, because as you saw in the long-term graph, historically the market has always moved up and to the right over time.

Human Interest’s 401(k): Technology vs. emotion

One of the reasons Human Interest was created was to help all people, regardless of their level of expertise and experience, with concepts like systematic risk or dollar-cost averaging, save with their 401(k)s in a strategic way that would have a measurable impact on their net worth and peace of mind.

Human Interest has built technology specifically for 401(k)s that has the potential to mitigate negative effects (because they typically are exactly that — negative) of emotional reactions to market movements and stock picking. Mathematical, logical, algorithm-based rebalancing is exactly what Human Interest’s investment tool provides (along with great, low-fee index funds that keep your portfolio diversified!).

The automated investing service makes all the investing decisions for you and maintains an optimal strategy even through times that may encourage non-rational decision-making. This ensures you’ll achieve maximum expected returns without the academically proven losses that result from individuals attempting to time the market.

In summary: Most people who stay the course will end up seeing the market rise again

Watching your retirement account’s value decrease can be difficult, but often the best thing to do is stay the course. The financial markets often move down and up over time, and if you pull money out or stop making contributions you’ll be locking in your losses and potentially missing out on future gains.

*Note that the information provided on this website does not, and is not intended to, constitute financial or legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.

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