What to do if your 401(k) is losing money

If your 401(k) is experiencing a decline in value, it can be disconcerting. However, it’s important to remember that fluctuations are a normal part of long-term investing. Whether the decrease in value is due to market downturns or the need for portfolio rebalancing, staying focused on your retirement savings goals is crucial.

Here are some steps you can take to navigate through a period of loss in your 401(k) account.

5 strategies to implement when your 401(k) is losing value

First and foremost, it’s essential not to panic. The value of your 401(k) will fluctuate over time, especially if you have a higher percentage of stock-based funds in your portfolio. These funds tend to be more volatile but also offer higher returns in the long run.

As a long-term investor, it’s important to remain steady during market fluctuations. Selling impulsively when your 401(k) loses value may prevent you from recovering those losses later on. Remember, a loss is only realized if you sell your investments. Some investors even take advantage of market dips to increase their holdings.

However, a decrease in value can serve as a reminder to review your financial goals and ensure that your 401(k) is still aligned with them.

1. Investigate the reasons behind the decline

Before making any changes to your portfolio, take the time to understand the market conditions that may be impacting your 401(k) account.

The market experiences both growth and decline cycles, and maintaining a long-term perspective is crucial. It’s easy to feel discouraged during market downturns and consider withdrawing your investments or selling in a panic. Instead, focus on the power of compounding growth over time and avoid reacting to short-term fluctuations. If the overall market is down, it may not be specific to your 401(k).

2. Continue making contributions

With dollar-cost averaging, you invest a fixed amount of money at regular intervals (e.g., 15% from each paycheck) regardless of market performance.

Consistent investing helps mitigate the impact of market volatility, allows you to benefit from both highs and lows, avoids trying to time the market, and potentially increases your purchasing power during market downturns. Maintaining your regular contributions can be a prudent approach.

3. Review your risk tolerance

Assess your portfolio and reconsider the time horizon for achieving your retirement objectives, as well as your willingness to tolerate risk. Depending on your timeline, you may need to adjust your 401(k) investment strategy and rebalance your portfolio.

• If retirement is approaching, consider shifting towards more stable investments to safeguard your retirement funds. Transitioning to bond funds, money market funds, and stable value funds may be beneficial.

• If you have a longer investment horizon, you might be able to take on more risk in pursuit of higher returns. Explore growth funds, index funds, and mutual funds that provide broad market exposure.

Remember that risk tolerance and investment strategies vary based on individual financial goals and risk preferences. What works for one person may not be suitable for another.

4. Minimize fees and expenses

Periodically review the fees associated with your 401(k) to determine if reducing expenses elsewhere makes sense. High fees can diminish your earnings over time by reducing the amount available for reinvestment.

• If you have an old 401(k) with high fees, consider transferring it to a new 401(k) or an individual retirement account (IRA) with lower fees.
• If your current 401(k) has high fees, explore other investment options within your plan that may be more cost-effective. You could also advocate for investments with lower fees or a plan better suited to your needs.

5. Seek advice from a financial advisor

Consulting with a financial advisor can provide valuable insights into assessing your 401(k) and long-term goals, as well as determining asset allocation based on your risk tolerance and time horizon.

A financial advisor may identify potential issues such as concentration risk within your portfolio that could be hindering your returns. Additionally, they can assist with tax planning and retirement withdrawals.

Key takeaways

If your 401(k) is experiencing a decline in value, it’s important to remain calm and assess whether adjustments are necessary. Start by reassessing your risk tolerance and asset allocation. Remember that while the market may have its fluctuations, maintaining a long-term strategy of consistent investing has historically proven beneficial for retirement savings.

Editorial Disclaimer: It is recommended that all investors conduct their own independent research on investment strategies before making decisions. Additionally, past performance of investment products does not guarantee future price appreciation.