Did your 401K drop by 40% this month?
Tap. tap. tap!!! This thing on? I'm sure we've all heard the joke before. The market hits a slide and here come the jokes! Man, my 401K looks more like a 201k now! HA! What's the old line? We have to laugh to keep from crying or something like that?
If you're 10 years out or more from retirement then congrats! You're 401K should've dropped by around 40%. That means you were invested in equities/equity type mutual funds like you should have been with that kind of time on your side. Well done! And if I were you, I would consider upping and even maxing out your 401K contributions asap. Gasp!!! I literally heard you gasp! Before you choke on all that cheese you've stored up due to COVID-19 here me out.
Stocks and equities are on sale big time right now. And by increasing your 401K contributions you can buy more shares with less money. As you continue to buy more shares with less money when the market rebounds your total shares will have increased and so will your total dollar amount. It's a little secret called dollar cost averaging.
Dollar cost averaging
Dollar cost averaging is a strategy in which an investor places a fixed dollar amount into a given investment (usually equity type investments) on a regular basis. The investment generally takes place each and every month regardless of what is occurring in the financial markets. As a result, when the price of a particular security declines, the investor will be able to purchase more shares.
Dollar cost averaging eliminates the issue of market timing, (which is a fallacy that most people believe in, but that's another blog for another day). As a result, an investor's returns will be determined more by the overall trend in a given stock as opposed to the investor's specific entry price. In addition, it helps investors reduce their cost basis on securities that decline in value.
How and when should I move to a safer retirement portfolio in my 401K?
Well hopefully you took advantage of dollar cost averaging throughout the years and your 401K looks more like an 801K now. See what I did there! But, as you near retirement, it is IMPERATIVE that you start to transition out of equity funds. When I say equity funds, I am referring to stock and growth oriented type mutual funds. Every 401k will have these labeled a little different but equity funds will typically by labeled something like this. Large Cap Funds, Mid Cap Funds, Small Cap Funds, Sector Funds, Multi Cap Funds, Growth Funds, Growth and Income Funds, etc...
With retirement looming, it is imperative that you transition out of equity funds into safe bets like money market funds, bond funds, balanced funds or similar. These funds won't grow a ton but they don't lose a ton either. Many times a stable income fund or a money market fund can even show growth in down markets. Equity funds can take 5-10 years to recoup their losses in declines like we are seeing due to the Coronavirus. And if you are close to retirement, you may not have the luxury to wait that long.
Don't put yourself in a situation that you can't retire due to whatever the Apocalypse Du Jour is at the moment. With proper planning and strategic investing, your retirement does no have to hinge on the market all.
At 80/20 Financial, we can help you plan your retirement. We are retirement planning specialists. We will never promise you that we can beat the market, but we can help you not to get beaten by the market. If you would like a second opinion on your 401K or your current retirement strategy please contact us. We would be honored to work with you.