How to safeguard your 401(k) during a bear market

Both stocks and bonds are trading in the "bear" zone. And, given the current state of affairs, the markets are likely to remain volatile for some time.

Interest rates are going up quickly as the US and European governments try to stop inflation from getting out of hand. Fears of a recession remain. And a sharp drop in the value of the British pound and rising UK debt costs are making people worry.

Stocks have returned to negative territory for the year, with the S&P 500 down more than 20% after being battered in the first half of 2022 and then recovering some of their losses.On the other hand, the S&P US aggregate bond index is down about 14%.

And over the next year, investors may see a lot more change.

Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said, "Markets are likely to be up and down over the next six to twelve months as the Federal Reserve continues to raise interest rates to fight inflation." If you want to buy stocks right now, you will need to be patient and hold on to them for a much longer time than most people are used to. In some cases, this could be two to three years.

Even though the road ahead may be rough, there are some things you can do to protect your long-term savings.
Don't try to time the market.

When markets go down, it can be hard on your mind. You might be tempted to sell your stock investments and put the money you get into cash or a money market fund.

You'll tell yourself that when things get better, you'll put the money back into stocks. But doing so will just ensure that you lose even more.

Don't think you can beat the current downward trends if you are a long-term investor. This includes people in their 60s and early 70s who may have been retired for 20 years or more.

"It's not about knowing when the market is going to go up or down." "It's about time on the market," said Taylor Wilson, the president of Greenstone Wealth Management in Forest City, Iowa, and a certified financial planner. When markets are going up, people tend to think that the good times will never end, and when markets are going down, people tend to think that things will never be good again. Focusing on things you can change and using tried-and-true methods will pay off in the long run. "

Say you put $10,000 in the S&P 500 at the beginning of 1981. Fidelity Management & Research says that by March 31, 2021, that amount of money would have grown to almost $1.1 million. But if you missed just the five best trading days in those 40 years, it would have grown to about $670,000. And if you had missed the best 30 days, your $10,000 would have grown to only $177,000 if you had done nothing.

Think about what you've done.

Even if you can convince yourself not to sell at a loss, you might still be tempted to stop putting money into your retirement plan for a while because you think you're just throwing good money after bad.

CFP Sefa Mawuli of Pavlov Financial Planning in Arlington, Virginia, said, "This is hard for a lot of people because their first instinct is to stop contributing until the market recovers."

But the key to a successful 401(k) is to make regular contributions. When markets go down, investors can buy assets at cheaper prices if they keep putting money in. This may help your account recover faster after a market downturn.

Wilson says that if you can afford it, you should even put in more money if you haven't already contributed the most. He said that taking a positive step can help ease the stress that can come from seeing your nest egg (temporarily) shrink.
Check your budget again.

Life happens. Changes happen. And so will your plan for when to retire. So, check to see if the way you currently divide your money between stocks and bonds fits your risk tolerance and when you want to retire.

Wilson said to do this even if you are in a fund with a set date. Target date funds are made for people who plan to retire in a certain year, like 2035 or 2040. As that date gets closer, the fund's allocation will become less risky. But, he said, if you started saving for retirement late and may need to take on more risk to reach your goals, your current target date fund may not give you that.
If you can't take it any longer, add to your "comfort cash."

Mark Struthers is a Certified Financial Planner (CFP) at Sona Wealth Advisors in Minneapolis. His firm is hired by organisations with 401(k) plans to help them improve their financial health.

So, people from all walks of life have told him that they "can't afford to lose" what they have. He said that early on in the pandemic, when the economy was going down, many smart investors also wanted to get out.

Struthers will tell them not to panic and to remember that investors have to go through bad times in order to get big returns during bull markets. But he knows that fear can make people do stupid things. You can't just tell people, "Don't sell," or you'll lose some customers and make them worse off.

And it's especially bad for investors to see that bonds, which are supposed to lower the overall risk of their portfolios, are also going down. Struthers said, "People lose faith."

Instead of calming their fears, he will try to persuade them to do something that will make them feel better in the short term but will have the least impact on their nest egg in the long run.

For example, someone may be afraid to take enough risk with their 401(k) investments, especially if the market is falling, because they don't want to lose more money and have less money to fall back on if they ever lose their job.

So, he reminds them of things they already have, like an emergency fund and disability insurance, that could help them in a bad situation. He may then tell them to keep taking enough risk to get the growth they need in their 401(k) for retirement but to put some of their new contributions into a low-risk or cash-like investment. Or, he might suggest that they put the money into a Roth IRA instead, since contributions to that account can be taken out without tax or penalty. But the money is also kept in a retirement account in case the person doesn't need it for an emergency.

Struthers said, "Just knowing they have that comfort money there keeps them from freaking out."