Anyone who has checked on their 401k recently knows these accounts have not been immune to the market volatility caused by the COVID-19 crisis. It can be unsettling to stand idly by as you watch your hard-earned savings take a hit. Like a ship tossed about the sea during a storm, you may feel you have little control. So, what can you do?
Here are our top four tips to keep your 401k on track during this unprecedented global pandemic…
Increase your allocation if you have the additional cash flow.
Many of us have reduced our expenses in this current quarantine environment. If your family’s income has remained mostly stable and expenses have dropped for a few months, consider increasing the percentage contribution you are making to the portfolio each month by 1-2%. You may find that it becomes a sustainable part of your savings plan even once your spending habits start to loosen up.
It’s also important to consider the asset allocation of your accounts. Let’s look at the effect a drop in the stock market has on a portfolio that starts off invested 75% in stocks and 25% in bonds. If the value of the stocks drops by 25% and the bonds hold their value, then your total account has dropped in value by about 15%. But your allocation has also changed. Now your portfolio is only 70% in stocks. In order to fully capture the eventual market rebound, rebalance your portfolio back to your original targets.
Don’t borrow if you don’t have to.
Though the CARES Act includes a provision to take out up to $100,000 from a 401(k) account with no penalties, resist the temptation to do so unless it’s absolutely necessary. It’s all too easy not to pay it back, plus you still have to pay taxes on your withdrawal. What’s more, you lose out on the opportunity for the market rebound, plus you miss the long-term compounding effects of your money growing tax-deferred over the long run.
Don’t give up!
It can be painful to make a contribution and then watch the value of your account drop. It is important to remember, however, that these are long term investments, and you are adding at lower prices than you were just a few months ago. Investing is a marathon, not a sprint. Take advantage of today’s lower prices to set yourself up for success in the future.
While today the seas may be rough, you can remain level headed, just as a good captain who steadily guides his ship through the storm. Keep your eyes open for opportunities to have the wind at your back when the sun begins to shine again.