It’s not easy to keep your cool in the face of a market
crash. Even if you were prepared and had a well-diversified portfolio with
everything from stocks to bonds to crypto, things can still go south, and it
can be hard to stomach when they do.
It doesn’t help that we’re constantly bombarded by news
reports about how bad things are for everyone else or that friends and
relatives might be quick to share their gloomy outlooks with us.
But there’s no need to panic: there are some tried-and-true
ways of coping with a crashing 401(k), which will minimize the damage and get
you back on track again much quicker than you might think.
So what should you do? I’ve put together a list of tips
below, so read on to find out how you can keep calm when your 401(k) crashes.
Tip #1: Don’t panic, and whatever you do, don’t cash out
Many investors tend to panic when they see their investments
going down. They tend to dump everything before things get worse to cut their
losses. This is normal behavior since nobody likes seeing their money evaporate
before their eyes. However, this is one of the worst things you can do, and
even more so in the case of your 401(k).
There are several reasons behind this. First of all,
withdrawing from your 401(k) early, i.e., before turning 59 and a half,
immediately generates a 10% penalty fee on your withdrawal, and you’ll have to
pay income tax on your withdrawal as well. This means you’ll be losing even
more money. In addition to this loss, there’s an even stronger reason to
refrain from selling your 401(k)’s positions.
Stock market crashes aren’t rare, but they’re also not
permanent.
This means that a bearish or down market will not keep going
down forever, and at some point, it will rebound and turn into a bullish
market. History has taught us that it will always recover to and surpass the
previous state before the crash, so holding on to your investment means that
things will get better, eventually. However, if you panic and decide to sell,
you’ll lock in your losses and won’t be able to take advantage of the rebound.
It’s impossible to predict what the market will do next,
and you’ll only end up losing more money by paying higher prices later on.
As long as you have a diversified portfolio that has both
stocks and bonds, you should be able to ride out the storm. If you aren’t
averse to risk, you can also invest part of your money in cryptocurrency
assets. By learning how crypto trading works and choosing a reputable crypto
exchange that offers plenty of options, you can potentially multiply your
savings even if there is a stock market crash.
Tip #2: Don’t check your portfolio every minute
It’s obviously good to be informed, but only if you plan to
act on that information. Since you should be holding on to your investment and
not cashing out, as I just suggested, it really doesn’t make any sense at all
to obsessively check your portfolio’s balance every minute. This will only
produce stress, anxiety and make it much harder to control yourself and refrain
from the urge to cash out.
Don’t make things worse by worrying your heart out. Instead,
be confident that things will recover as they always have in decades of
stock-market history.
Tip #3: Review your goals to assess the damage
Don’t interpret the last piece of advice as sticking your
head in the sand and forgetting about your 401(k) entirely. On the contrary, it
means that you should keep checking your balance as you usually would to make
sure that things are as you planned them to be.
However, a substantial market downturn can affect the viability
of the goals you initially set for your retirement portfolio, so if you haven’t
done so already, now would be a good time to review your financial goals and
see what’s still achievable given the current market conditions.
You’ll need to consider things like cash flow needs,
retirement age, employer matches, etc.
This could mean cutting back expenses to save more and cover
the downturn’s setback, or perhaps working longer than you had initially
planned. Either way, you must adjust your plans, so they’re in line with the
current market conditions to avoid making things worse by trying to achieve
unachievable goals.
Tip #4: Don’t stop contributing to your 401(k) – Do the
opposite and contribute more if your can
Remember that market crashes aren’t a sign that the economy
is going down the drain – just that some stocks are overvalued while others
aren’t. When the market crashes, it’s the equivalent of some stocks going on
sale, so if you had planned to buy some low-priced stocks or mutual funds, now
would be a good time to do so since the prices have dropped.
This may seem like one of the most counterintuitive
suggestions to make, but it makes a lot of sense. When you think about it, the
whole point of investing is to buy low and sell high later down the road. Well,
there’s no better time to buy low than during a market crisis, so it’s the
perfect time to invest even more in stocks.
Remember, the stock market has always shown a tendency to go
up over time, even if there are the occasional crashes, so buying in as low as
possible can be an excellent investment opportunity. This is especially true if
your employer matches your contributions. If this is the case, you should
always strive to maximize your employer’s contribution (it is free money, after
all).
Tip #5: Rebalance your portfolio and stick to your guns
Diversification is all about spreading risks. Stocks go up,
bonds go down, and visa versa, so having different types of investments can
help smooth out returns over time – that means that even if one part of your
plan goes through hard times, the other parts may still be doing okay.
One of the critical principles behind diversification is
that it can help reduce risk by limiting exposure to any single asset class,
stock, sector, or country. As a result, if you have a diversified portfolio, it
will help drive your returns higher over the long term, even if the short term
looks grim.
One of the consequences of the stock market crashes is that
your portfolio becomes unbalanced. This is because your stocks are losing value
in front of your other assets. Therefore, it’s important to rebalance your
portfolio after a crash to perform the way you want it to moving forward. This
seeks to make sure it’s still as diversified as before to protect you from
further losses if something else crashes as well.
The Bottom Line
In case of a market crash, the best thing you can do is keep
calm and ride out the storm. However, if you did your homework and prepared for
a downturn ahead of time, you should have a diversified portfolio that can
buffer the blow. You should also have a good emergency fund that will take care
of your spending without having to resort to cashing out your 401(k) if you
lose your primary income source.
Even if it does hit you unawares, the key to maintaining
your cool during a stock market crash is being rational and reviewing your
goals so you can adjust if need be. You should also never stop contributing but
rather contribute more if you can. Aside from that, remember that your 401(k)
is just one piece of your retirement puzzle; don’t obsess over it.
Check it only as much as you need to assess whether or not
it’s performing according to plan, but no more than once or twice every
quarter.
With these tips in mind, not only will you avoid making
unnecessary withdrawals that will incur fees and taxes, but you may end up
having even better growth than before after taking advantage of the low stock
prices during the crash.
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