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Published on: 02/10/2023 • 7 min read

How Do I Protect My 401(k) From a Market Crash?

Because 401(k) plans are often invested in stocks and other securities, which can experience significant losses during a market downturn, it is entirely possible for your 410(k) to be negatively affected by a market crash. However, savvy investors shouldn’t let this be cause for panic.

Investors tend to make inadvisable decisions when they believe a market crash is on the horizon. Bull markets can turn into bear markets overnight, and it can be natural to assume that by pulling everything out of the market you are making a proactive decision — not one that weakens both your position in the market and the market itself. So, what should you do instead? How do you protect your 401(k) from a market crash?

The high-net-worth wealth management professionals at Avidian Wealth Solutions know a thing or two about thriving in an unpredictable market and are here to offer solutions on the steps you can take to protect yourself from market instability while continuing to build on your legacy. 

Should I worry about my 401(k) during a market crash?

Let’s say the stock market is looking volatile. Do you lose your 401(k) if the stock market crashes? Not exactly. 

While the value of a 401(k) account may decrease during a market crash, it is important to note that the market has traditionally always recovered, and long-term investment strategies often prevail over short-term market volatility for the prepared investor. 

All that to say, based on historical trends, you shouldn’t worry about losing your 401(k), but you should be ready to invest some time in protecting it. The good news is that there are plenty of strategies you can use to protect your 401(k) in the event of a market crash.

Tips on protecting your 401(k) in an unstable market

1. Don’t panic, don’t quit

It’s only natural to be nervous about the well-being of your investments, after all, they can be a huge signifier of your overall financial health, but try your best not to panic. Making irrational decisions based on knee-jerk reactions is never a good way to handle your finances, especially without input from your financial advisor. It might be the correct move to pull some money out or to move some money around, but withdrawing your portfolio or having a fire sale in a bear market will do nothing to help you long-term. 

Setting yourself up for long-term success often requires taking a step back. Similar to how investors should avoid trying to time the market by buying low and selling high, it causes unnecessary risk to try to time market downturns and pull out before it hits a low.

2. Contribute even if the market is in a downturn

Even when the market is in a downturn, there are still opportunities to grow your wealth or at least the potential for it. By continuing to contribute to your 401(k) you will effectively be purchasing stocks at a very low rate. Additionally, realized losses for those with taxable accounts will allow the account holders to offset tax liability, and those with traditional Roth IRAs will owe at a reduced rate. 

Dollar-cost averaging during market downturns can be a sound strategy. Dollar-cost averaging involves investing a fixed amount of money at regular intervals, regardless of share prices or market conditions. This can help smooth out the ups and downs of the market and reduce the impact of a market crash, as well as reduce stress levels by removing another decision that you need to make. 

3. Rebalance your portfolio

Part of planning accordingly includes making sure that your portfolio is balanced. As some investments perform and others do not, the distribution of your investments will change rapidly. Revisiting how much weight each investment is given regularly will ensure that your portfolio is healthy and prepared for whatever the market brings. 

Target-date funds are a great way to make sure that your portfolio remains balanced. Target date funds are groups of investments that are all set to mature at certain times, that can then move on to safer assets as those target dates pass. 

If you pick your own 401(k) investments, it’s ideal that you rebalance your portfolio at least once a year, and as often as once a quarter. Rebalancing your portfolio is also particularly crucial for clients nearing retirement. Speak to your retirement income advisor to make sure that your portfolio is set up in a way that protects your decades of hard work while still offering the potential for growth.

Continue reading: Where is the safest place to put your retirement money?

4. Diversify your portfolio

It’s conventional wisdom in personal finance that a diversified portfolio is a healthy portfolio — one that is better prepared to face market-wide or sector-specific uncertainties. A few important things to note about diversifying your portfolio include:

  • Diversification is not just about stocks vs. bonds, although this ratio is still important. You also want to give consideration to diversifying the industries and sectors that are represented in your portfolio.
  • Don’t forget about index funds. Broad indexes can likely bring safety and diversification to your portfolio without expending too much effort. 
  • Look at your level of liquidity, and attempt to balance that number. You need enough to provide yourself protection but not so much that you will lose value because of inflation. 
  • Do not over-diversify. At a certain point diversification of a portfolio for the sake of diversifying can produce diminishing returns and a weakened position. 

Uncertainty in the market is something that everyone eventually has to deal with. Reviewing your portfolio to make sure that it is balanced and diversified before the market is in a downturn is one of the best tools you have against that uncertainty.

5. Know your risk tolerance

Being honest about your risk tolerance is a great weapon against the woes of economic uncertainty. If you know how much of a drop your portfolio can take, you likely know how much liquidity you need to cover yourself, and at what point your portfolio is actually in trouble.  

Risk assessment is something that is difficult to do on your own. Before you decide to pack up all of your investments and pull out of the market, talk to your financial advisor about your concerns. By establishing formal financial risk management strategies, you can feel confident in the future of your 401(k) and avoid making an emotional decision because you’re intimidated by the market. 

At Avidian, we approach risk management with the gravity of trusted fiduciaries and the personally-tailored, research-based investing strategies that only a multi-disciplinary team of financial professionals is capable of. 

6. Bet on yourself, not your employer

As well as keeping liquid assets on hand, it is important to stay up to date on the condition of any company stock, and not place your financial health entirely upon the health of one organization. No matter how well your company is doing or hell well your shares are doing, it’s wise to avoid allocating a large portion of your wealth to the company stock. In other words, try to avoid putting all of your eggs in one basket. 

7. Seek advice from professionals

Consulting a team of multi-disciplinary financial professionals can help you make informed decisions about how to invest and how to protect those investments. Financial advisors have seen it all, from bull markets to bear markets and everything in between, and exist to help their clients weather the ups and downs and come out stronger on the other side. 

Concerned about your 401(k)s ability to weather a bear market? Avidian Wealth Solutions can help.

Protecting your 401(k) from a market crash is all about not panicking, and making sure that your portfolio is diversified and balanced. Protecting your overall financial health while the market is in a downturn involves assessing your own risk and working to have a plan in place that protects yourself if your assets begin to lose value. 

You can be prepared for anything, but you will need to invest your time and energy into the preparation. Working with a trusted fiduciary financial advisor can help set your mind at ease, and make sure that you and your portfolio are prepared for whatever is to come.

Avidian Wealth Solutions is a Texas-based wealth management firm offering investment management, estate planning services, retirement tax strategies, and more to high-net-worth individuals, families, and business owners. Schedule a consultation with us today to find out about the Avidian Difference.

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