It’s not easy to be battling that sinking feeling when you review your 401(k) plan in a down market. As the stock market plummets, your 401(k) account balance begins to trend downward. And while there is no way for stock and bond investors to avoid short-term losses when market volatility hits, there are several ways to protect your finances from the effects of the market storm and maintain your savings plan for the future retirement underway.
What you don’t want to do when stock prices are constantly declining is hit the panic button and make hasty retirement investment decisions that could, on the contrary, do more harm than good to your savings. “What investors say What they should do is remember not to let their emotions be their portfolios’ worst enemy,” says Sam Stovall, chief investment strategist at CFRA Research.
The Truth About Market Declines and Your 401(k)
Investors, of course, got spooked in early August when a weaker-than-expected job creation figure put Wall Street on recession alert. The S&P 500, an indicator of the broader US financial market, was hit by an 8.5% decline. And the Nasdaq Composite, an index full of large-cap technology stocks, fell into correction territory with a significant decline, down 13.1% from its early July peak.
The problem with being frightened by market declines is that they are rare and don’t take long. “Market declines are normal; they’re going to happen,” says Catherine Irby Arnold of US Bank Private Wealth Management. In fact, “so-called market “retracements,” or declines of 5% to 9.99%, have occurred three times a year on average since the 1930s” according to BofA Global Research. And “checks,” or drops ranging from 10% to 19.99%, are not that uncommon either, despite the fear and anguish they generate.
A review like the one the Nasdaq went through from its July 10 closing high to its Aug. 7 low typically happens once a year, BofA says. And fortunately, the dreaded bear markets, or scarier declines of 20% or more, happen even less frequently.
Saving Your 401(k) from the Next Market Crash
What investors need to understand staying in control of their anxiety and fear and avoid the expensive mistake of selling at the bottom out of fear and missing out on the subsequent recovery, the action that the market has a tendency to recover faster than people might think. We’ve had 100 declines ranging from pullbacks to bear markets since the World War II years, according to CFRA Research.
“But what’s surprising is the speed it takes to get back to equilibrium,” Stovall said. On average, it has taken just 46 days, or just a month and a half, for the S&P 500 to fully recover from pullbacks, according to CFRA. And the market has recovered its losses, following 24 corrections since World War II, in just under four months. Run-of-the-mill bear markets, or declines of 20% to 40%, take a little longer to recover, averaging just over five months.
