Rising interest rates and a recent spate of bank failures. Each adds to the uncertainty in the economy right now. Layoffs and store closures don’t help.
All these news events have brought volatility back to the stock and bond markets.
Many of my 401(k) advice clients have asked me what investors should be doing about it. So, I thought I would write down the two most important things to think about.
DON’T panic and make emotional decisions.
During times of uncertainty or fear humans are prone to make bad decisions. Based on their “fight or flight” response. Yes, this is even true of our financial decisions!
Your 401(k) is even more emotional. It is awfully hard to watch your last several years of 401(k) investment gains slip away. Especially following last year’s terrible stock and bond market losses.
When market volatility strikes, many people make knee-jerk 401(k) investment management decisions. So, they can feel like they are doing something. So, they can feel “in control.”
But think about when you’re driving a car, and you see an animal in the road. What happens when you jerk the wheel? Yep – you’ll overcorrect and increase your odds of crashing.
The same is true with your 401(k) mutual funds. Knee-jerk, or emotional decisions, often tend to do more harm than whatever it is we’re reacting to!
So, when deciding to buy or sell a 401(k) mutual fund, always ask yourself, “Why am I doing this?
Do you have a specific reason? Or is it because you have to do something?”
If concerned about a future stock market decline, that is a good reason to sell a stock mutual fund in your 401(k). If concerned about a continued rise in interest rates, that is a good reason to sell a bond mutual fund in your 401(k).
Have a plan. Building up a 401(k) money market balance now is a good idea. But make sure you know why you are selling any 401(k) mutual funds now.
If you are thinking about buying any 401(k) mutual funds now, I don’t have any good advice for you. Again, have a good reason.
DO think about your 401(k) risk tolerance.
Market volatility is a good time to determine whether you own the right 401(k) mutual funds. Those are the mutual funds that go up in value at least equal to or greater than the broad stock market averages.
When the stock markets fall, those same mutual funds don’t fall in value as much as the broad stock market averages.
You have already made the decision of how much risk you want to take in your 401(k). The only question now is how much MORE risk do you want to take in your 401(k)?
Think about a 401(k) “stop loss” going forward. If your 401(k) account balance drops below a certain level, you are out! Sell the worst 401(k) mutual fund you own. Place the proceeds in the safety of the money market.
Don’t know the worst 401(k) mutual fund you own now? A second opinion would help. Reach out to me and I can provide you with more specific information. To improve your 401(k) investment management decision.
Ric Lager
Lager & Company, Inc.
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