And yet, many people do just that. During market downturns, investors often move money from their 401(k)’s stock accounts into perceived safer accounts, such as those primarily containing bonds or other fi xed-income securities. This move may result in reduced volatility on your 401(k) statements, and if that’s all you want, you might be satisfi ed. But you do need to realize the cost involved – specifi cally, fi xed-income investments will not provide the same rate of return that equities (stocks) can. So, if you liquidate some of your equity holdings, you may slow the growth potential of your 401(k), which, in turn, could slow your progress toward your long-term fi nancial goals. Furthermore, if you get rid of substantial amounts of your equities when their price is down, you won’t be able to benefi t from owning them when their value goes up again – in other words, you’ll be on the sidelines during the next market rally.
Here’s the key issue: A 401(k) or similar employersponsored retirement plan is a long-term investment account, whereas moves made in reaction to market drops are designed to produce shortterm results. In other words, these types of actions are essentially incompatible with the ultimate objective of your 401(k).
Of course, when the market is volatile, you may want to do something with your 401(k), but, in most cases, you’re far better off by sticking with the investment mix that’s appropriate for your goals, risk tolerance and time horizon. However, this doesn’t mean you should never adjust your 401(k)’s portfolio. In fact, you may well want to make some changes under these circumstances:
• You’re nearing retirement – If you are nearing retirement, you may need to prepare your 401(k) for future downturns – after all, you don’t want to have to start taking withdrawals when your portfolio is down. So, if you are within, say, fi ve years of retirement, you may need to shift some, but certainly not all, of your assets from growth-oriented vehicles to income-producing ones.
• Your goals have changed – Even when you’re many years away from retirement, you probably have an idea of what that lifestyle will look like. Perhaps you plan to travel for several months of the year or purchase a vacation home in a different climate. These are expensive goals and may require you to invest somewhat aggressively in your 401(k). But you could change your mind. If you were to scale back your plans – perhaps more volunteering, less traveling – you might be able to afford to “step off the gas” a little and invest somewhat more conservatively in your 401(k), though you will always need a reasonable percentage of growth-oriented investments.
By responding to factors such as these, rather than short-term market declines, you can get the most from your 401(k), allowing it to become a valuable part of your retirement income.
[Arnetta Tolley, Financial Advisor Edward Jones Investments 626-744-2740 or arnetta.tolley@edwardjones. com.]