Did your 401k drop 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! 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 20-30%. 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 increase and/or even max out your 401K contributions right now. I think I heard you gasp, but hear me out first.
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, without emotion, 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, you may want to start to transition out of equity funds. (if you have a pension this info does not apply to you.) When I say equity funds, I am referring to stock and growth oriented type mutual funds that contain the best companies in the United States and the world.. Every 401k will have these labeled a little different but equity funds will typically be labeled something like S&P 500 Fund, Diversified Growth Fund, Value Stock Fund, Small Company Stuck Fund, etc.
If you are 5 years or less from retirement, it can be wise to strategically 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 time 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.
You Need A Plan
A goal of retiring - without a plan to get there - is simply a plan to never retire. Retirement isn't some magical age. It's a dollar amount. If you're age 50 or over and still in the accumulation phase (pre-retirement) we can help you figure out where you need to go and how to get there. If you are retired or nearing retirement, we can create a plan which will outpace inflation and possibly leave a legacy to your family. The consultation is free and without obligation. Contact us to set up a consultation.
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Thanks for reading!
80/20 Financial Services is an independent Registered Investment Advisory Firm. We help clients age 50 and over plan their retirement income and investment strategies. Contact us today for help with your retirement needs.