Investing

Here's What to Do If Your 401(k) Is Losing Money

Aman Jain

Published: May 8, 2023 10:54 pm

Investing in a 401(k) is a smart way to build wealth for retirement over time, but it is not without risks. It is possible for even a 401(k) to lose money. If your 401(k) is losing money, you need to know that it isn’t unusual. Also, you don’t need to panic, as you can still get things back on track. In this article, we will discuss things that you can do if your 401(k) is losing money.

Why A 401(K) Could Lose Money

Market volatility is part and parcel of investing in the financial markets. When markets go down sharply, it concerns even the most stalwart investors.

Your 401(k) is not a savings account but an investment account. So, it will make or lose money depending on the performance of the financial instruments you have invested in. If you check your 401(k) regularly and the markets are going down, it may seem to you that your hard-earned retirement savings is being washed away.

In such a case, however, it is important that you don’t panic. Rather, you should focus on understanding why your 401(k) is losing money and what you could do now.

What To Do If Your 401(K) Is Losing Money

As noted above, the first thing that you need to do if your 401(k) is losing money is not to panic. It is usual for the market to go up and down. So, if your 401(k) is losing money, don’t rush to unload assets. Instead, take your time to decide on strategies that could help you turn things around.

Now that you have decided not to panic-sell your assets, the following are the strategies you should deploy to turn things around.

Make Sure You Have A Diversified Portfolio

This is the best strategy to reduce your risk. If you have invested all your savings in one stock and it plummets, it could wipe out all your money. On the other hand, you won’t feel much impact if you have invested in 100 instruments and one or two lose value.

Thus, it is a good idea to spread your money among stocks, bonds and other financial instruments. How much money you should invest in each instrument depends on your investment goals and risk tolerance.

Along with investing in various instruments, you should diversify your investment across different sectors as well. Moreover, you could also consider investing in international stocks or funds of different sizes (large-cap and mid- or small-cap funds).

Re-Evaluate Your Investments

If your 401(k) is losing money, it is an opportunity to re-balance or re-evaluate your portfolio. For instance, if you have individual stocks in your retirement plan, then you should evaluate the performance of each. If any stock is consistently losing value, replacing it with a more promising one is better.

If you are uncomfortable with individual stocks, consider investing in broad market index funds. It will not only help you to diversify your portfolio but will also save you from the stress of selecting individual stocks.

Don’t Stop Saving And Investing

It has often been seen that people stop their IRA or 401(k) contributions if their account balance is going down. However, it is very important to continue investing in a retirement account, especially if you have some time left before you retire.

Also, investors should remember that they get tax benefits on the contributions made to a traditional IRA or 401(k) plan. Getting such tax benefits is crucial, especially if your income has increased and you now fall into a higher tax bracket.

Sit Back And Relax

If you have some time before you retire, and you believe your investment is well diversified and you don’t need to re-balance your portfolio, then the best strategy is to sit back and relax. This is because it isn’t wise to judge the long-term potential of an investment from its recent short-term performance.

So, even if your investment took a short-term hit, there are always good chances that your portfolio could rise again long before you require the funds. Thus, it is recommended that you continue to make contributions without worrying too much about short-term dips. In fact, short-term benefits may benefit you in the long run by allowing you to get quality stocks at a discount.

Separately, it is also recommended that you avoid daily portfolio check-ins. If the markets are going down, seeing your portfolio losing value daily can shake your confidence and may even tempt you toward panic selling. So, if you have a time advantage, you should back your long-term game plan.

Move To More Stable Investments

If you are nearing retirement and your 401(k) is losing money, your portfolio may have little time to recover. In such a case, it is recommended that you move to more stable investments, such as bonds. Another option for such investors is to shift their money to low-volatility ETFs.

Although such investments may not offer returns as big as individual stocks, they still offer reasonable returns at much less risk.

Seek Professional Help

Never feel shy to take professional advice. Even if you are confident in managing your funds independently, taking professional advice is always recommended. A professional adviser may come up with suggestions that you may be overlooking. If you are worried about the cost of a professional adviser, don’t be. Professional help may be available for free as 401(k)s are employer-sponsored.

Final Words

Watching your hard-earned money lose value is never easy. Still, not panicking is the key. Also, it is good to remember that your money has the potential to grow as long as it is invested. If you have time to let the market recover, let the market forces work. If you’re closer to retirement, then it might be better to move to stable investments and consult your benefits manager or investment professional.

This article originally appeared on ValueWalk