Peer pressure may have incited you to wear acid-wash jeans in the '80s or drink beer even when you didn't like the taste. But don't let peer pressure affect your retirement portfolio. Just because it feels like everyone else is making moves in their 401(k) doesn't mean you have to.

401(k) administrator Alight reports that trading surged in its retirement plans at the end of February. The last week of the month actually showed more trading activity than the entire fourth quarter of 2019. On Feb. 28 specifically, net trading activity was 15.8 times the average daily level. Many 401(k) savers are, apparently, making trades in response to market volatility fueled by coronavirus concerns.

Woman looking at computer screen and taking notes

Image source: Getty Images.

But even as friends, neighbors, and relatives panic and sell, you're wise to stay calm and remember the oldest rule of buy-and-hold investing: Don't make trading decisions based on market conditions. 401(k)s are intended to support your long-term financial goals, and that means there are only three situations when you should be trading in that account.

1. To refine your 401(k) investments to match goals

Experts recommend investing your 401(k) funds in 50% to 80% stocks, depending on your age and risk tolerance. Your age is relevant because it dictates your investment timeline. Younger, more aggressive savers, who have time and emotional resilience on their side, can lean toward the 80% mark. They'll get more volatility, but a shot at higher returns. Older, more conservative savers should hold a lower percentage of stocks. That'll deliver more stability along with lower returns.

If you feel the need to take action in this market, that action could be as simple as reassessing your retirement timeline and your risk tolerance. You may decide that retirement at 60 isn't realistic after all, or that the market swings upset you more than you expected. If an adjustment to your portfolio composition is needed, you can do it in two ways:

  • By immediately selling off some assets and buying others. This approach makes sense if you're transitioning to a more aggressive investment strategy. You'd sell off some of your bond funds to invest in equity funds. Verify that you're not realizing any big losses in this process -- which should be the case since bond funds are relatively stable. An advantage here is that, right now, you can pick up equity funds well below their historic highs.
  • By adjusting how new contributions are invested. Moving to a more conservative strategy requires reducing your equity holdings and increasing debt securities and cash. Unfortunately, it's not a great time to sell off your equities, like those S&P 500 index fund shares. Doing so would lock in your losses and reduce the opportunity to benefit from recovery gains. A better approach is to adjust your investment choices for new contributions and let the asset allocation change happen gradually.

2. To upgrade your investment choices

Another good reason to buy and sell in your 401(k) is to upgrade your holdings. 401(k)s do add new fund options from time to time, and those additions might be better than what you're invested in today. Review current fund options relative to what you own. If you like the composition of your portfolio, look for funds that have a similar investment strategy, but lower expense ratios. All else being equal, a fund with a lower expense ratio produces higher returns.

You can make those upgrades immediately by trading, or gradually by changing your investment choices going forward. Again, if you have to realize a bunch of losses to make the change, it's usually better to take the gradual approach.

3. To buy securities on sale

Even after some big gains in the last week of March, the S&P 500 was still down 20% in the first quarter of this year. You can look at that decline as a disaster, or you can view it as an opportunity -- something like a clearance sale on stocks. For example, at the start of the year, you'd have paid almost $300 for a single share of Vanguard 500 Index Fund (VFINX -0.02%). At the end of March, that same share would have cost you less than $240. If there ever was a time to "buy low," it's now.

This isn't a strategy for the faint of heart, however. Those shares have lower prices because the U.S. economy is fundamentally different today than it was on Jan. 1. And there's no telling when we will get the upper hand on coronavirus and return to our normal lives. In the short term, the market may continue to be a rollercoaster. But there's definitely upside if you have the fortitude to ride it out.

Trade with intent, not panic

Don't let the peer pressure get to you. You're not going to come out ahead by selling off all your equities in favor of fixed income funds -- even if your neighbors say that's what they did. Stay the course and make choices that align with your long-term goals. It may take time, but the equities market will eventually recover and you'll be glad you stuck around.