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3 Moves You Should Make With Your 401(k) If the Stock Market Crashes

By Catherine Brock – Jul 5, 2020 at 12:02PM

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Here's how to get your retirement back on track after a collapse.

Will the stock market crash again in 2020? No one really knows, but a little market turmoil in the months ahead wouldn't be all that surprising. The coronavirus pandemic is worsening in the U.S., expanded unemployment benefits are about to expire, and some states are implementing mandatory business closures once again. All these factors can affect investor sentiment, how the stock market moves, and ultimately the balance in your 401(k).

If that happens and your 401(k) balance drops, here are three moves you can make to course-correct.

Man frustrated while looking at his laptop

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1. Review the damage

Your first step is to review what's happened. Take a deep breath, log in to 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 any positions that individually experienced losses greater than the stock market as a whole, see if you can glean any takeaways. For example, were high expense ratios to blame for the underperformance? Or were you invested in a specialty fund that was hit particularly hard?

Look at your funds' holdings and asset composition, too. Perhaps your target-date fund had a high percentage of stocks, even though you thought it was a fairly conservative position. Make a note of anything that might help you choose better funds in the future.

Repeat that process for your more resilient positions. Dive into their composition, expenses, and investment style. Look at their longer-term performance before the crash and see what conclusions you can make about how different types of assets respond to changing market conditions.

2. Adjust your investment mix

Once you've reviewed how each fund contributed to your portfolio's performance through the crash, turn your attention to your investment mix. That is your lever to reduce risk and add stability. Simply lower the percentage of each contribution that's going toward your most volatile funds. Then, pick up the slack by increasing the amount being invested in your steadier positions. As your contributions are invested more conservatively, you'll gradually lower the risk in your portfolio. 

You could also sell off some of your risky positions, but that's often not the right move following a crash. At that point, you'll have the biggest unrealized losses in your most aggressive funds. Sell them and you lock in those losses and forgo the opportunity to benefit from a recovery in those positions.

3. Adjust your contributions

Next, consider whether you need to adjust your contributions. If your targeted retirement date is more than five years away and you're generally happy with your 401(k) strategy, it's premature to make any drastic changes. This crisis could be long past us in three years, after all. If anything, you could increase your contributions to take advantage of lower share prices following a crash.

The go-forward plan is harder to sort out if you had planned on retiring this year. Leaving your contributions as is gives you the best chance at participating in recovery gains. But if the stock market goes into an extended downturn with share prices falling over time, you'll need a different approach. You don't want to invest, see those investments immediately lose value, and then have to liquidate at a loss to take your retirement withdrawals. Sidestep that scenario by saving to a cash account instead of your 401(k). Then, when it's time to take retirement distributions, pull from your cash account first.

Whatever you do, don't panic

If the market does go into a downward spiral, do your best to be methodical about reviewing the impact, gathering takeaways, and making adjustments. Otherwise, you're at risk of letting emotions guide your decision making, and that generally takes you down the wrong path. If you feel panic rising, step away from your analysis temporarily. 

It helps to remember that throughout history, the market has always recovered from crashes. And when the market recovers, so will your 401(k).

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