The past eight months have been extremely volatile from a stock market perspective. So a lot of people are now sitting on year-to-date losses in their investment portfolios.
If your 401(k) or IRA balance has taken a major hit this year, you may be starting to panic. After all, you need that money to grow year after year so you're able to nicely supplement your Social Security income in retirement. And the last thing you want is to keep contributing funds to your retirement plan, only to see your balance decrease.
While losses in a retirement plan can be upsetting, they're also par for the course right now. Here's what you should do if your 401(k) or IRA has taken a hit.
1. Don't lose your cool
It's natural to be thrown for a loop if your retirement plan is worth less now than it was at the start of the year -- especially if you've been contributing steadily to it since January. But one thing you shouldn't do is start unloading stocks in your retirement plan to minimize losses. If you sell off investments now, you might lock in losses, rather than give your savings a chance to recover.
If you're many years away from retirement, the current state of your 401(k) or IRA isn't something you should lose sleep over. As such, your best bet is to not panic-sell investments, but rather, let this period of volatility run its course.
2. Make sure you're diversified
The money you're investing for retirement shouldn't just sit in a single sector of the market. If you go that route, it might take longer for your portfolio to recover from downturns and you might limit the extent to which your 401(k) or IRA is able to grow.
Take a look at your investments and make sure they're targeting a wide range of industries. If they're not, consider branching out or buying index funds, which allow you to invest in the broad market without having to research different companies individually.
3. Keep socking money away
It may seem counterintuitive to keep funding your 401(k) or IRA at a time when the stock market is so shaky. But actually, now's a good time to be investing money because stocks are largely down across the board, so you can scoop up shares at a discount.
Furthermore, if you're saving for retirement in a traditional 401(k) or IRA, it means you're getting an immediate tax break on the money you're contributing. That's not something you should give up. In fact, not funding one of these plans could end up bumping you into a higher tax bracket, so that alone is a good reason to keep contributing.
Look to the light at the end of the tunnel
This isn't the first time investors have had to endure a prolonged period of stock market turbulence. But in the past, the stock market has always managed to recover from downturns, so there's no reason to think this time will be different.
As such, try not to fixate on the fact that your retirement plan is down. Instead, try to focus on the future and keep funding that account so you're able to retire with the nest egg you deserve.