When is the best time to plan for a stock sell-off? When the indices are hitting new highs, of course.
Rarely do investors consider defensive moves in their 401(k)s when stocks are rallying, but that is precisely when you should begin thinking about diversifying your investments.
When stocks get squirrely, I recall a comment from my old colleague, Noel, who used to declare,'Well, it’s either the warning bell or the dinner bell.'More often than not, as we have discussed in previous columns, it'sthe dinner bell.
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From the time I began investing in 1987 through last year, stocks, as measured by the Dow Jones industrial average,have generated positive returns in 27 of 33 years,or 82% of the annual periods over that time span. Thatstretch includes Black Monday in 1987, when I began my career, the 2000-2002 market slide and the bear market in 2008 through March2009.
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All of that proves that stock sell-offs usually provide a golden opportunity to heap more holdings onto your plate at lower prices. By the way, the cumulative total return from Jan.1, 1987, through the end of last year was 3,415%.
An event like Black Monday, my friends, was an epic dinner bell.
Buy low, sells high withyour 401(k)
If you, like me, believe stocks are still in a long-term bullmarket, then meaningful downturns (think Q4 2018) provide a happy opportunity to look at our 401(k) contributions and allocations with new eyes. The hardest part of investing is to be a buyerof stocks in a fallingmarket and a sellerin a rising one.It just feels wrong. But it works.
When stocks begin their inevitable slide (markets experience a correction of 5% to 10% in just about every annual period), increase your contribution level to your 401(k). It simply makes sense to buy more of something when it is cheaper. You can dial your contribution back once the market rallies if you must, but you will have used the weakness to increase your purchasing power. This will be a powerful contributor to total over a 401(k) lifetime.
Dividend-paying stocks
Add a fund that invests in dividend-paying stocks with proceeds from your soaring growth fund. The most important consideration is a fund that invests in companies that grow their dividend each year. No longer just associated with electric utilities and industries that grow when the economy is strong – dividends are now paid by technology companies like Microsoft andApple as well as thoselike Starbucks and McDonalds that have long been categorized as growth stocks. The advantage of investing in these stocks is that the companies tend to grow the dividend faster than the traditional dividend payers. A second advantage isthe power of compounding growing dividends enhances total return and provides natural protection in declining markets.
Rebalancing your allocations
Don’t forget the rest of the globe. The U.S. is frequently the best house on the global block. But global markets can provide additional diversification and total return. This may be a good place to invest when U.S. stocks are hitting historical highs.
You should also rebalance holdings that have appreciated far above the initial target you selected. Outperformance is good. But you don’t want the market making your asset allocation decisions for you. If you determined to place 50% of your 401(k) in a particular fund, allow it to run, but if it gets to be more than 10%-15% above your initial allocation, trim it back and transfer the money to a fund that offers fresh diversification or may have lagged recently. Again, you are increasing your purchasing power.
It is true that being invested through good years and bad provides a compelling total return. Never succumb to the siren song that convinces us when stocks are rising that they will continue to do so. Nor should you yield to the temptation to sell out when stocks are declining. Having sold stocks at the end of the painful bear market of 2008 would have cost you the opportunity to enjoy the 333% that stocks returned (again as measured by the DJIA) from Jan.1, 2009, through last year.
Your 401(k) is meant to be invested for the long term.But you should be an active participant in your future. Consider the old investing maxim that exhorts investors to buy low and sell high. Tuning out the noise will allow you make important adjustments to your investments at turning points.
Nancy Tengler is chief investment strategist at Tengler Wealth Management, ButcherJoseph Asset Management and the author of “The Women’s Guide to Successful Investing.”
Add a fund that invests in dividend-paying stocks with proceeds from your soaring growth fund. The most important consideration is a fund that invests in companies that grow their dividend each year.
“We believe the key thing to do is to keep your 401(k) funds invested. If you take them out of the market, you may lock in losses and could miss out on opportunities for market rebounds.”
Instead, consider buying at discount prices. Try to avoid making 401(k) withdrawals early, as you will incur taxes on the withdrawal in addition to a 10% penalty. If you are closer to retirement, it is smart to shift your 401(k) allocations to more conservative assets like bonds and money market funds.
Market volatility can be scary, but keep in mind that, historically, stock markets have recovered from dips and gone on to see better returns in the long run. Instead of getting out of the stock market, most retirees use a “buy and hold” strategy to maximize long-term gains exactly for this reason.
It's a good rule of thumb to avoid making a 401(k) early withdrawal just because you're nervous about losing money in the short term. It's also not a great idea to cash out your 401(k) to pay off debt or buy a car, Harding says. Early withdrawals from a 401(k) should be only for true emergencies, he says.
If the dollar collapses, your 401(k) would lose a significant amount of value, possibly even becoming worthless. Inflation would result if the dollar collapsed, decreasing the real value of the dollar when compared to other global currencies, which in effect would reduce the value of your 401(k).
Should you reduce 401(k) contributions during a recession? You should aim to contribute as much as you can to your 401(k) regardless of economic events. A recession is one of the best times to contribute to your 401(k) because the stock market is usually down. In other words, you can buy your investments on sale.
Your investment is put into various asset options, including stocks. The value of those stocks is directly tied to the stock market's performance. This means that when the stock market is up, so is your investment, and vice versa. The odds are the value of your retirement savings may decline if the market crashes.
Certain strategies, such as continuing to contribute to retirement accounts, can reduce the higher taxable income for someone older than 73. Depending on specific circ*mstances, workers over age 73 can still contribute to an IRA, a 401(k), and other retirement accounts.
401(k) retirement plans may be “frozen” by a company's management, temporarily halting new contributions and withdrawals. A freeze can occur in the case of a corporate restructuring such as a merger or if your company changes 401(k) plan providers.
The financial services firm handles more than 45 million retirement accounts total. The average 401(k) balance ended 2023 up 14% from a year earlier to $118,600, Fidelity found. The average individual retirement account balance also gained 12% year over year to $116,600 in the fourth quarter of 2023.
Fortunately, analysts see positive earnings and revenue growth for all eleven market sectors this year. The healthcare sector is expected to generate a market-leading 17.8% earnings growth in 2024, while the information technology sector is expected to lead the way with 9.3% revenue growth.
Cash equivalents include short-term, highly liquid assets with minimal risk, such as Treasury bills, money market funds and certificates of deposit. Money market funds and high-yield savings are also places to salt away cash in a downturn.
1. Positive returns -- but smaller than in 2023. I think that the overall stock market will deliver positive returns in 2024. However, I expect those returns to be somewhat smaller than they were last year.
The value of a 401(k) account, or any retirement account, always depends on how the account is invested. For many people who are still decades away from retirement, their portfolios will largely consist of stocks, which may suffer declines during a recession or economic slowdown.
The IRS allows penalty-free withdrawals from retirement accounts after age 59½ and requires withdrawals after age 72. (These are called required minimum distributions, or RMDs). There are some exceptions to these rules for 401(k) plans and other qualified plans.
It is possible to lose money in a Roth IRA depending on the investments chosen. Roth IRAs are not 100% safe, but they offer the potential for growth over time. Market fluctuations and early withdrawal penalties can cause a Roth IRA to lose money.
Introduction: My name is Edwin Metz, I am a fair, energetic, helpful, brave, outstanding, nice, helpful person who loves writing and wants to share my knowledge and understanding with you.
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