Hearing that your 401(k) account balance has dropped can be disheartening and upsetting, but it’s important to keep in mind that this is perfectly normal and expected.
Market fluctuations are an inherent part of investing, but your 401(k) should be used over an extended period to build savings and secure its future growth.
Market volatility can jolt even the most seasoned investors, yet it can provide an opportunity to purchase assets at discounted prices. Financial planners may recommend increasing your allocation during times of volatile markets if you are close to retirement or have significant savings outside your workplace retirement account.
Market volatility may be caused by many different factors. This includes unexpected economic news, changes to Federal Reserve monetary policy and geopolitical events.
Stock prices tend to be more volatile in certain industries and sectors. Oil-related stocks in particular tend to experience increased price fluctuation when prices fluctuate due to increased government regulations or decreased oil production; other industry-specific reasons for volatility could include weather events or changes in supply of raw materials that affect company finances and lead to stock price losses. One way of monitoring market volatility is via Cboe Volatility Index (VIX).
Unexpected expenses can be devastating to your budget. From home repairs and car purchases to unexpected medical costs and retirement account balance declines, any unanticipated expense can leave you feeling powerless over your finances and anxious about its future.
There are a few steps you can take to prevent your retirement account from declining and to gain control of your finances and position yourself for long-term financial success.
Before rolling over your retirement accounts, consult a financial advisor. They can assess your circumstances and recommend an economical strategy tailored to you; help manage unexpected expenses that arise; assist in finding strategies to rebalance portfolios or use dollar-cost-averaging to invest during volatile markets; as well as guide through rebalancing and dollar cost-averaging investment plans for retirement accounts.
Rebalancing Your Portfolio
Rebalancing is essential to building and managing a diversified portfolio. Rebalancing can ensure that any one asset class or sector doesn’t become too high a percentage of your overall investments and increase risk exposure.
Rebalancing can take many forms, but in general it involves selling investments that have outshone others to purchase those that may be underperforming. For instance, if your equity fund has outperformed bond and Treasury funds, selling stocks from one group in order to purchase more stocks from the latter category.
Rebalancing may be time-consuming, but it can also be extremely beneficial to investors with long-term investment horizons and an acceptable tolerance for market fluctuations. Many advisors suggest rebalancing on a quarterly or annual basis, though frequency may depend on an investor’s strategy and risk tolerance. Rebalancing can also be made simpler through target date funds which automatically rebalance over time.
Long-Term Investment Strategy
Long-term investments, like retirement accounts, should allow for long-term growth over time. This can occur if you invest in assets with higher potential returns such as growth stocks or choose reinvested dividends instead of taking cash dividends out.
Long-term investment strategies require diversifying your portfolio so as to protect it against market downturns or unexpected events, helping reduce any shock when your retirement account balance is affected by adverse conditions. This strategy also can reduce any tax consequences when your investments take a hit.
Watching your IRA or 401(k) balance decrease can be alarming, but by adhering to a long-term investing strategy and not panic selling you can remain on track with reaching your retirement financial goals. Take time to investigate why losses have occurred before evaluating whether your investing plan still aligns with your goals and risk tolerance.