The Dow has been on a roller coaster. Are we all doomed?
20thCentFox/Courtesy Everett CollectionDon’t fret about market volatility in your 401(k) just yet. DMAMBMCMDMEMGPREVIEWZBZBRZDZDRZFZGZQZRZSZTZU
The Dow Jones Industrial Average (^DJI) is crawling back after last week’s roller coaster of returns and losses. What does market volatility like that even do to a 401(k) plan?
The answer isn’t so simple. There’s a very good chance every retirement account will be affected by the volatility, since some portion of even the best diversified plans will be tied to equities. To be more precise, how much of an impact the volatility has depends on what funds employees are invested in, how much of their portfolios are allocated to those investments, and when they plan to retire.
“Next month’s statement probably won’t look so good for people,” said Eric Reich, an adviser at Reich Asset Management in Marmora, N.J. “Do not worry about this at all.”
See: Panicked about a stock-market crash? What you need to remember fits on one note card
Still, investors were worried about their accounts, especially after the Dow Jones Industrial Average and S&P 500 (^GSPC) entered correction territory at the end of Thursday. A correction in the market happens when a stock, fund or, in this case, indexes, drop 10% from a recent peak. Sharp swings in the market continued into the next day.
Two-thirds of 401(k) participants were directly or indirectly invested in equities at the end of 2015, according to the Employee Benefit Research Institute, which consists of mutual funds and other pooled investments. The rest was a mix of target-date funds (which are also invested in equities mostly at its inception and then gradually rebalanced to conservative investments as the retirement year of the employee approaches), bond funds, guaranteed investment contracts and other types of investments. More plan participants were invested in stocks at the end of 2015 than before the financial crisis in 2007, the report, which was published in August 2017, found.
In most cases, U.S. stock funds will see the greatest declines, more so than international stock funds, said Kevin Gahagan, a financial adviser at Mosaic Financial Planning in San Francisco. Fixed income bonds are not safe from a decline either, given the potential for rising interest rates. Still, if accounts are well diversified, employees won’t see a decline nearly as bad as the market as a whole, he said.
“The key for retirement plan participants is to not lose their long-term discipline and react to current market conditions,” he said.
This week’s market volatility may have come as a surprise for some people, after more than a year of gains that had investors bragging they were “401(k) millionaires,” and going so far as posting their balances on social media. President Donald Trump has also been boasting about the bull market, claiming it as a win under his presidency. All gains beginning in 2018 have already been erased, but experts say nobody should react too quickly to the volatility or call the end of a bull market — at least not yet. While the market is sorting itself out, advisers have been telling their clients volatility is to be expected when investing, and for long-term goals, such as retirement, there’s nothing to fear.
Also see: How long until you’re a 401(k) millionaire? Check this chart
So what to do right now? Increase contribution rates, rebalance your account if necessary and then forget about it, Reich said. And next time there’s a downturn? Consider adding more money to your retirement fund. Why? Because there’s a silver lining to the downturns: stocks are “on sale,” experts say.
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Alessandra Malito is a personal finance reporter based in New York. You can follow her on Twitter @malito_ali.
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