Retirement planning

How to guard against a market crash for your 401(k)

After spending the majority of your working life building up your 401(k), a catastrophic market collapse threatens your retirement goals. What steps can you take to keep your portfolio safe?

Avoiding panic is the first thing to do when a market catastrophe is imminent. Throughout the life of your 401(k), market corrections and cyclical downturns are likely to happen more than once every few years (k). Even while they can be unsettling, market crashes are a crucial moment to maintain your investments in long-term accounts and avoid making quick, emotional decisions that could end up costing you a lot of money.

Market crashes might occasionally be unforeseen, but you should always try to be prepared for them. In the past, many investors adhered to the “60/40” investment strategy, allocating 60% of their portfolio to stocks and 40% to bonds. Along with changing market conditions, that advice has also altered, and experts now suggest fresh strategies for reducing market risk.

Here are some strategies for preserving your 401(k) when the market declines.

Stay committed

Experts appear to unanimously concur that maintaining your 401(k) plan even in uncertain times is crucial.

According to Anessa Custovic, CIO and investment adviser representative at Chapel Hill-based consulting firm Cardinal Retirement Planning, you should begin investing consistently with your goal in mind. “Don’t let the recession stop you from contributing to your 401(k)” (k). Don’t let a downturn or bear market cause you to make a rash decision.

Withdrawing funds from the market during periods of turbulence may have the reverse effect of what you were hoping for in the long run.

Keeping your 401(k) assets invested, according to Eric Phillips, CFA, senior director of San Francisco-based 401(k) provider Human Interest, is the most important thing to do. If you remove them from the market, you run the risk of locking in losses and missing out on chances for market rebounds.

Dollar-cost averaging is a useful strategy for matching your investments with retirement planning objectives. This strategy entails making a fixed monthly contribution to your 401(k) (or a predetermined percentage of your salary), regardless of general market conditions. And because of the way most 401(k) participants make their contributions, this occurs automatically for them already.

Dean Elliott, CPFA, managing partner at Global Wealth Advisors, a Texas-based advisory firm, says that adding to your 401(k) per paycheck in addition to any employer contributions is an excellent strategy to buy some shares at a lower price and assist lower your cost basis on your assets.

This may gradually lower your break-even point and enable you to recover losses more quickly once the market turns around.

Additionally, keep in mind that employer matching contributions boost your gains irrespective of market conditions. Even when the market is experiencing a slump, matching can still offer an immediate return of 25 to 50 percent or more. This money is put into your account on your behalf, therefore it is even more crucial to keep investing despite whatever difficulties your portfolio may otherwise have.

Adjust as necessary based on your time frame.

When you’re seeking to retire, it’s critical to think about after you’ve calmed your nerves in the face of a bear market. This action is crucial because a 57-year-old who is getting close to retirement will need to treat market downturns differently than a 32-year-old.

Investors who are between five and seven years away from retirement

Investors who are five to seven years away from retirement would be wise to create a financial plan for their 401(k) in advance and to refer to it during market turbulence. Typically, a plan is created in collaboration with a financial counselor or a 401(k) provider representative.

According to CEO of Pennsylvania-based advice business One Up Financial, Eric Presogna, CPA, “This doesn’t have to be a 50-page document with fancy charts and graphs.” It might be as straightforward as a one-page overview of all your investments, earnings, and net worth with one or two sentences describing your investment philosophy and strategy.

These kinds of expert financial plans frequently consider bad markets and market crashes, in addition to many other market eventualities, so when a collapse occurs and you’re getting close to retirement, you can refer to them and feel confident that you’re acting in your best interests.

For investors who are getting close to retirement, Elliott advises running a 401(k) stress test. “This will enable them to see what might happen during different market scenarios, such as interest rate increases, bear markets, bull markets, or even a financial crash, and then adjust their investment portfolio accordingly,” Elliott says.

Investors of all ages should do stress tests, but they become more important as you get closer to retirement.

If you are an investor who is 59 1/2 years of age or older, you might want to consider rolling over your account to an IRA because it will give you access to more investment alternatives.

According to Anthony Pellegrino, founder and principal of Illinois-based advisory firm Goldstone Financial Group, “this opens up practically endless alternatives for your assets and you can discover additional strategies to diversify and protect yourself in low markets.”

Investors who will retire in more than seven years

The plan is a little bit easier for investors who have more time before they need to start taking from their 401(k) holdings.

“Younger investors won’t touch their 401(k) for decades; hence, the current changes are just noise. According to Brian Walsh, CFP, senior manager of financial planning at SoFi, “I understand that noise may get fairly loud and irritating, but that doesn’t mean you need to make wholesale changes.

A 401(k) and other defined contribution plans are created for long-term goals. Therefore, compared to an investor who is closer to retirement, your investments can be riskier the further you are from your intended retirement date. Making your 401(k) overly conservative is a serious error.

Presogna continues, “The greatest method to reduce the financial harm of a recession is to simply stop checking your balance if your time horizon is long enough, i.e. seven years or more out from retirement. According to studies, investors who frequently review their portfolios exhibit a higher level of loss aversion, making them more sensitive to losses than gains.

Losses can cause you to make poor decisions right now, which will only hurt your performance in the future.

Verify that your portfolio is prepared for success.

The greatest method to safeguard your 401(k) against downturns is to ensure that your investing strategy is sound before a crash. Make sure to create a well-balanced and diversified portfolio to start, or, if you haven’t already, evaluate and diversify immediately.

Rebalancing frequently

To make sure your portfolio is in line with your time horizon and risk tolerance, you should rebalance it frequently. Regular portfolio rebalancing will ensure that your allocation does not go too far from alignment when one asset class appreciates more than others.

According to Elliott, rebalancing helps investors to benefit from buying low and selling high to ensure that their allocation is where they want it to be.

If not every six months, then at least once a year, he advises rebalancing your portfolio to ensure that the assets are distributed properly. With your advisor or the plan representative, who can both guide you through your investments and offer suggestions depending on your objectives, you can arrange a rebalancing of your 401(k).


Any successful investment portfolio must be diverse, especially for long-term funds like 401(k)s. Reduce your exposure to a single market sector during market downturns by diversifying your portfolio across many asset classes and markets.

Additionally, equities will fluctuate in price, some rising and some falling, even during market crashes. Your portfolio’s diversification enables you to potentially capture some of that advantage.

According to Ryan Larson, wealth advisor and CEO and founder of Scottsdale, Arizona-based advisory firm FirstLine Financial, “Building a retirement portfolio that includes a balanced blend of growth, fixed-income products, and safety of principal is a surefire way of creating a longevity plan for your assets — a plan that can sustain you during your retirement years.”

You can choose exactly how that mixture is chosen, or you can ask a knowledgeable counselor for assistance.

Review the classic saying “60/40”

In the past, to balance an investing portfolio, most consultants would advise allocating 60% to stocks and 40% to bonds. Some experts believe that the old standard has to be reconsidered because of how the times have changed, particularly in the post-pandemic economy.

Because it is hitting both equities and bonds, the current market is distinct from previous periods of volatility, according to Walsh. In the past, when the stock market was volatile, bonds could act as a “safe haven,” but not now. Although bonds are performing better than stocks, a 60/40 portfolio is expected to have one of its worst years ever. For people approaching or in retirement, this is especially concerning when coupled with multi-decade high inflation.

To battle excessive inflation, interest rates have increased at a historically high rate this year.

Presogna continues, “as a result, investors aren’t getting the downside protection they’re used to from high-quality fixed income, since bonds are down almost as much as stocks in 2022.”

Bonds are no longer the cornerstone they once were, so if investors believe another crash is imminent, they will need to think creatively about defensive investments.

Again, experts tend to concur that it’s probably better to remain put and ride the wave out while making sure you’re always diversified for investors with lengthy time horizons.

Those who are approaching retirement may wish to think about converting any existing 401(k) accounts into either IRAs (which provide greater investing alternatives) or annuities (which can provide a set rate of return during uncertain times).

Several fixed annuities can offer seniors on the verge of retirement a steady, fixed rate of return. The warning is that if the market recovers, they will miss out on the chance for possible upside. However, they may be an excellent choice if safety is your top priority.

To sum up

The best course of action for the vast majority of investors is to ensure that their 401(k)s are diversified year-round and to avoid panic selling in the midst of a bear market. No matter your age, it’s important to be aware of your investments, but people who have a long time horizon should have faith in the benefits of compounding and time in their retirement account.

Investors who are close to retiring may need to be more cautious due to changing market conditions. Depending on what you choose, switching from your standard 401(k) to annuities or IRAs can let you have more alternatives or receive a fixed rate of return.

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