During a bull market, it's easy to forget that good times don't last forever. But during a bear market, every time your statement arrives it is all too clear that your hard-earned dollars are evaporating along with your hopes of a financially secure retirement.
What should you do when times get tough? These four steps will help you bear-proof your 401(k) plan.
- Make a solid investment plan to reach your retirement goals.
- Be sure your 401(k) investments are diversified.
- Reaffirm that your plan is the right one for the long-run.
- Don't sell in a panic. Buy at sale prices.
Set Your Goals
Stumbling through bad times without a strategy makes a shaky situation worse. If you don't know how much money you need to achieve your goals, you won't be able to accurately assess the damage when times get tough.
Investing isn't about trying to pick a hot stock or mutual fund and riding it to the moon. You should have a goal, and a plan to reach that goal. That goal should include a time frame for achievement and a backup plan in case things don't go as well as expected.
Plan Your Asset Allocation
After you've determined how much money you will need, the next step is to figure out how your investments can help you get there.
In this regard, asset allocation is the key. Your money should be divided among several investments that are more aggressive or more conservative depending on your personal risk tolerance. In a bull market, a conservative investment like a bond fund seems awfully dull. In a bear market, it can be a life-saver.
Whatever the markets are doing today or tomorrow, diversification can help reduce your risk and increase your overall returns.
This is particularly important if your employer's stock makes up a big chunk of your retirement portfolio. If the stock market is in trouble, having too many eggs in one basket could scramble your returns.
A down market is not the time to make radical changes. Whatever happens, don't blindly sell your equity funds and move all of the remaining assets into a money market fund. The urge to flee to safety can be nearly overpowering, but keep in mind that your current losses are all on paper. That is, unless you sell now and lock in those losses. If retirement is still years away, you have time to let your portfolio recover.
What should you do during a bear market? If you had a long-term investment strategy in place before the markets took a dive, it's time to revisit your plan. Are your goals still the same? Is your retirement still years in the future? If the particulars of your situation haven't changed, this is no time to change your overall investment strategy.
Stock prices rise and fall. Just because they have fallen doesn't mean your strategy should change.
When the markets drop, everybody wants to sell and get out. This is illogical behavior driven by panic.
If you saw that something you wanted—a car, a resort weekend, a computer—was on sale, you'd snap it up in a minute. Investments are no different. Just as fund prices don't rise forever, they don't fall forever either. If you bought when prices are higher than they are today, selling low is not the key to investment success.
Over the long term, the stock market has gone up. Use that trend to your advantage.
Buying low is a better idea. Think about those bear-market prices. Stocks are on sale! Buy them.
If you can afford to invest a greater percentage of your income, now is the time to increase contributions to your 401(k) plan. If your employer offers a company match, increase your contribution at least to the level that will get you the full match. It's a guaranteed return on your investment and will help you recoup the losses caused by a bear market.
Remember, over the long term, the stock market historically has gone up. This trend is your friend. Use it to your advantage.