5 Tips to Keep Calm When Your 401(k) Crashes
It’s not easy to keep your cool in the face of a market crash. Even if you were prepared and had a well-diversified portfolio with everything from stocks to bonds...
It’s not easy to keep your cool in the face of a market crash. Even if you were prepared and had a well-diversified portfolio with everything from stocks to bonds to crypto, things can still go south, and it can be hard to stomach when they do.
It doesn’t help that we’re constantly bombarded by news reports about how bad things are for everyone else or that friends and relatives might be quick to share their gloomy outlooks with us.
But there’s no need to panic: there are some tried-and-true ways of coping with a crashing 401(k), which will minimize the damage and get you back on track again much quicker than you might think.
So what should you do? I’ve put together a list of tips below, so read on to find out how you can keep calm when your 401(k) crashes.
Tip #1: Don’t panic, and whatever you do, don’t cash out
Many investors tend to panic when they see their investments going down. They tend to dump everything before things get worse to cut their losses. This is normal behavior since nobody likes seeing their money evaporate before their eyes. However, this is one of the worst things you can do, and even more so in the case of your 401(k).
There are several reasons behind this. First of all, withdrawing from your 401(k) early, i.e., before turning 59 and a half, immediately generates a 10% penalty fee on your withdrawal, and you’ll have to pay income tax on your withdrawal as well. This means you’ll be losing even more money. In addition to this loss, there’s an even stronger reason to refrain from selling your 401(k)’s positions.
Stock market crashes aren’t rare, but they’re also not permanent.
This means that a bearish or down market will not keep going down forever, and at some point, it will rebound and turn into a bullish market. History has taught us that it will always recover to and surpass the previous state before the crash, so holding on to your investment means that things will get better, eventually. However, if you panic and decide to sell, you’ll lock in your losses and won’t be able to take advantage of the rebound.
It’s impossible to predict what the market will do next, and you’ll only end up losing more money by paying higher prices later on.
As long as you have a diversified portfolio that has both stocks and bonds, you should be able to ride out the storm. If you aren’t averse to risk, you can also invest part of your money in cryptocurrency assets. By learning how crypto trading works and choosing a reputable crypto exchange that offers plenty of options, you can potentially multiply your savings even if there is a stock market crash.
Tip #2: Don’t check your portfolio every minute
It’s obviously good to be informed, but only if you plan to act on that information. Since you should be holding on to your investment and not cashing out, as I just suggested, it really doesn’t make any sense at all to obsessively check your portfolio’s balance every minute. This will only produce stress, anxiety and make it much harder to control yourself and refrain from the urge to cash out.
Don’t make things worse by worrying your heart out. Instead, be confident that things will recover as they always have in decades of stock-market history.
Tip #3: Review your goals to assess the damage
Don’t interpret the last piece of advice as sticking your head in the sand and forgetting about your 401(k) entirely. On the contrary, it means that you should keep checking your balance as you usually would to make sure that things are as you planned them to be.
However, a substantial market downturn can affect the viability of the goals you initially set for your retirement portfolio, so if you haven’t done so already, now would be a good time to review your financial goals and see what’s still achievable given the current market conditions.
You’ll need to consider things like cash flow needs, retirement age, employer matches, etc.
This could mean cutting back expenses to save more and cover the downturn’s setback, or perhaps working longer than you had initially planned. Either way, you must adjust your plans, so they’re in line with the current market conditions to avoid making things worse by trying to achieve unachievable goals.
Tip #4: Don’t stop contributing to your 401(k) – Do the opposite and contribute more if your can
Remember that market crashes aren’t a sign that the economy is going down the drain – just that some stocks are overvalued while others aren’t. When the market crashes, it’s the equivalent of some stocks going on sale, so if you had planned to buy some low-priced stocks or mutual funds, now would be a good time to do so since the prices have dropped.
This may seem like one of the most counterintuitive suggestions to make, but it makes a lot of sense. When you think about it, the whole point of investing is to buy low and sell high later down the road. Well, there’s no better time to buy low than during a market crisis, so it’s the perfect time to invest even more in stocks.
Remember, the stock market has always shown a tendency to go up over time, even if there are the occasional crashes, so buying in as low as possible can be an excellent investment opportunity. This is especially true if your employer matches your contributions. If this is the case, you should always strive to maximize your employer’s contribution (it is free money, after all).
Tip #5: Rebalance your portfolio and stick to your guns
Diversification is all about spreading risks. Stocks go up, bonds go down, and visa versa, so having different types of investments can help smooth out returns over time – that means that even if one part of your plan goes through hard times, the other parts may still be doing okay.
One of the critical principles behind diversification is that it can help reduce risk by limiting exposure to any single asset class, stock, sector, or country. As a result, if you have a diversified portfolio, it will help drive your returns higher over the long term, even if the short term looks grim.
One of the consequences of the stock market crashes is that your portfolio becomes unbalanced. This is because your stocks are losing value in front of your other assets. Therefore, it’s important to rebalance your portfolio after a crash to perform the way you want it to moving forward. This seeks to make sure it’s still as diversified as before to protect you from further losses if something else crashes as well.
The Bottom Line
In case of a market crash, the best thing you can do is keep calm and ride out the storm. However, if you did your homework and prepared for a downturn ahead of time, you should have a diversified portfolio that can buffer the blow. You should also have a good emergency fund that will take care of your spending without having to resort to cashing out your 401(k) if you lose your primary income source.
Even if it does hit you unawares, the key to maintaining your cool during a stock market crash is being rational and reviewing your goals so you can adjust if need be. You should also never stop contributing but rather contribute more if you can. Aside from that, remember that your 401(k) is just one piece of your retirement puzzle; don’t obsess over it.
Check it only as much as you need to assess whether or not it’s performing according to plan, but no more than once or twice every quarter.
With these tips in mind, not only will you avoid making unnecessary withdrawals that will incur fees and taxes, but you may end up having even better growth than before after taking advantage of the low stock prices during the crash.