The best way to avoid panicking when the balances in your 401k or other investment accounts go down is to learn some basics about the stock market and develop good investing discipline/habits. Over and over, research shows that emotional investment decisions means worse investment returns. The key to successful investing is more about having a disciplined approach and plan rather than great knowledge or experience. Your investment plan is called an asset allocation.
3 basic investment concepts for your 401k
- Investors invest in the stock market in order to get higher returns than what they would receive in a checking or savings account over the long run, i.e., 10 years.
- These higher returns are a result of taking investment risk. This means that you get higher investment returns over the long run, but in the short run you may experience some uncomfortable losses as the stock market typically loses more than it gains about 1 out of every 3 – 4 years.
- While it is always disappointing to see your balances go down, even if you understand losses are short term, trying to keep in mind that when the stock market corrects and loses 10-20%, this is a buying opportunity.
4 ways to minimize risk within your retirement accounts
- Be aware of your time horizon. If you will need funds in the next several years, better to keep them in a savings or money market account.
- Diversify:
- Make sure your 401k holdings are well-diversified between stocks and bonds! And then diversity into various bond fund and various stock funds
- Target-retirement date funds are a great choice as they are well-diversified, automatically rebalance, and become more conservative as you get closer to retirement. You can pretty much “set & forget.”
- Rebalance: Rebalancing helps you sell a bit of your over-valued securities and then buy into undervalued securities.
- Target-date retirement investment options automatically rebalances your investments.
- Many 401ks also offer an “auto-rebalance” feature that you can sign up for. Annually or quarterly is fine.
- Continue investing regularly every month! Especially after the stock market corrects! Consider this is an opportunity to buy stocks at bargain prices!
There are many great resources for information. Many 401k plans include information on the website. Another good source is MorningStar.com—they even include a series of easy-to-understand mini-courses you can use for self-study.
