The market is acting up — here's what you should do about it

Don't panic — and don’t look at your 401(k).

  • By Alessandra Malito,
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Some 401(k) account holders were running toward safer investments after seeing market volatility on Monday, but they shouldn’t have been, experts say.

Trading into fixed income was almost three times as high on Monday, after stocks had their worst day of the year, according to Alight Solutions, a benefit and human resources research and administration firm. The Dow Jones Industrial Average (.DJI) was 2.9% lower than it started that day, the S&P 500 (.SPX), declined by 3% and the Nasdaq Composite Index (.IXIC) was down 3.5%. Although they rebounded a bit Tuesday, analysts suspect more ugly days in the coming months.

A normal day in 401(k) trading occurs in 0.016% of all balances, but was up to 0.044% on Monday. It doesn’t seem like much, said Rob Austin, director of research at Alight, but the firm’s 401(k) Index showed favor toward fixed income. “That is the opposite of what it should be,” he said. “It locks you in to some losses.”

Of course there are times when you may want to act. Investors near retirement might not want to be as heavily invested in equities as someone just starting her career, for fear of a deep drop in assets affecting his retirement plans. There is a delicate balance between how money should be allocated close to retirement, but advisers warn near-retirees should be proactive and safeguard their current assets so that they aren’t pushing their retirement date years into the future.

It’s also helpful to keep in mind your balance may not drop too drastically. Yes, you will see a decline in your assets if you’re heavily invested in equities, but a proper portfolio is diversified, which means it is invested in numerous types of asset classes, and thus, each will be affected differently by market volatility.

“Making changes based on market movement is never a good idea,” said Theodore Haley, president at Advanced Wealth Management in Portland, Ore. Instead, they should reconnect with their financial planner, or find one, and remind themselves why they’re invested the way they are.

Here’s what else you should — and shouldn’t — do:

Do consider rebalancing

While you shouldn’t run to change how much your portfolio is invested in bonds, you should make sure your portfolio is invested as it was originally intended.

Market volatility gradually changes the position of asset allocation over time, which makes big market changes an opportune time to go in and rebalance. “This will likely selling off a portion of their bonds, which have rallied, and buy the dip in equities,” said Gustavo Vega, co-founder and chief planning officer at WealthEngage in Miami.

Don’t jump into bonds

Many 401(k) holders were moving investments into fixed income, like bonds, but that’s not always the best idea. Equities assist in higher returns in the long-term, and most 401(k) plans aren’t meant to be touched for decades.

Switching to fixed income could result is less money in the future. Instead of running toward bonds, people with available cash should enter the market and invest in equities or other asset classes that are underweight within their portfolios, Thomas Balcom, founder of 1650 Wealth Management in Lauderdale-by-the-Sea, Fla.

Do think carefully about your risk profile

“For most long-term investors who have been through market cycles before and are comfortable with volatility, this is no news,” said Dennis Nolte, a financial adviser and vice president at Seacoast Investment Services in Winter Park, Fla. But not everyone remembers the last downturn or the drastic, albeit short, drops in the last year, and the current volatility may scare investors.

Don’t decrease your contribution rate

Increase it, said Monica Dwyer, vice president at Harvest Financial Advisors in West Chester, Ohio. “When you see the market drop, especially if it drops substantially, go into your 401(k) and increase your withholding by a few percentages, or whatever you can afford,” she said.

Essentially, you’re buying equities when they’re “on sale,” advisers say. Warren Buffett, the celebrated investor and chief executive officer of holding company Berkshire Hathaway, once said “be fearful when others are greedy and greedy when others are fearful.”

Do keep your eye on the long-term

Market volatility lowering your assets would be a bummer if you were planning to buy a home with that money in the next few months — but if your goal is saving for your retirement, as it should be with a 401(k), this really is just a small blip on the journey, said Sean Pearson, a financial adviser at Ameriprise Financial in Conshohocken, Pa.

A drop in savings now, even by a few thousand dollars, is still just a fraction of a percentage point when thinking about that money in monthly withdrawals. “Losing $6,000 can be stressful,” Pearson said, “but the volatility is part of what is expected when using an investment vehicle that is helping you save for expenses that is years — or even decades — away.”

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