Aviva Pinto is a CDFA, CDS and Managing Director and Wealth Manager at Wealthspire Advisors.
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Your quarterly 401(k) plan statement just arrived and your balance is much lower than before. Do not panic. It is perfectly normal to be nervous when you see you have a lower value than last quarter. Just take a deep breath. Markets fluctuate. 401(k) plans are meant for the long term.
It is perfectly normal to worry about losing value in your 401(k) plan when you see the stock markets falling globally. But, you must remember you have a long-term time horizon. Men and women are living well into their 90s. Even if you are retiring tomorrow and you are 59 ½ and can withdraw from your plan penalty free, your money will have to last another 30 years if you live to your 90s.
It is not uncommon for stocks to fall, and they routinely do so every year. According to Morningstar, on average, stocks generally sell off during the year by 12.6%. However, losses in the stock market over long periods are uncommon. There has only been one instance of negative returns for large cap stocks during a 10-year period since 1936.
If you look at your statement and see that your 401(k) has lost money—it is only on paper. Until a position is sold, the holding has the ability to rebound when the markets stabilize. Those who try to time the market and jump out end up not knowing when to get back in.
According to data from Morningstar, if you had missed the 10 best days of the market between 1990 and 2021, your return would have been approximately 3% less than if you had stayed invested. Missing the 50 best days you would have had a return over 8% lower.
Year-to-date, the S&P 500 market index is down close to 20% at the time of writing this piece. Imagine you panicked and sold your 401(k) holdings and went to cash today. It is very unlikely that you would put the money back into the market within two weeks.
What is surprising is that Morningstar charts show that eight of the worst 10 days between 1990 and 6/20/22 occurred within two weeks of the 10 best days. You would have to jump back in and know the exact time to get back in. As we all know, it is impossible to time the market. It is therefore best to stay invested and focus on the fact that markets do rebound.
401(k) Plans Allow You To Dollar Cost Average
With a 401(k) plan, you are adding money to your portfolio every paycheck. In effect, you are dollar cost averaging. What that means is that you are buying when the market is low, and you are buying when the market is high. Over time your average cost for the positions will be smoothed out. You are periodically making purchases regardless of whether the market is up or down.
If the market is shaky, this doesn’t mean you have to stop investing or change your allocation to cash. Your 401(k) is one of the best ways to save for your retirement. It accumulates tax-free, and many employers match a percentage of what you contribute.
You could consider staying invested, continuing to contribute regularly before retirement and only using money in your 401(k) as a last resort. Taking early withdrawals will incur taxes as well as a 10% penalty. If you are close to having to take the required minimum distributions, you will still have a long-term time horizon, but if you cannot tolerate the volatility, consider shifting some of the assets into more conservative assets.
By staying the course, your 401(k) plan can continue to grow in volatile markets, helping you achieve your retirement goals.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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