How to think about your 401(k) and navigate a volatile market, according to experts

Ok, so you just checked your 401(k) and it doesn’t look good. In fact, it looks pretty terrible.

But don’t worry, you are not alone.

With the bond market having one of its worst years ever and the S&P 500 falling more than 24% since January, most US investors are feeling the pain.

And as predictions of an impending recession — or “something worse” — continue to pour in from Wall Street, even the most seasoned investors are battening down the hatches.

With that in mind, Fortune Contacted some of the top wealth managers for advice on how best to navigate these dangerous markets and preserve the value of your 401(k). Here’s what they had to say.

“Keep calm and invest”

The first mistake most people make when they see big losses in their retirement accounts is to rush to sell.

Everyone has heard the old adage “buy low, sell high”, but in practice this can be easier said than done.

“While financial advisors everywhere preach ‘buy low and sell high,’ investors’ emotions will drive the opposite behaviors,” said Kimberly Nelson, advisor at wealth management firm Coastal Bridge Advisors. Fortune. “The urge to do something to stem the carnage in your retirement account during a market downturn, recession or bear market can be hard to ignore.”

Nelson thinks investors should avoid offloading their 401(k) holdings at this point because stocks are already down more than 24% this year, and the timing of market entries and exits can be a challenge.

“Usually taking action after the market falls doesn’t do much to protect your nest egg,” Nelson said. “Exiting the market means you have to be right on the exit point and again on your re-entry point – market timing is almost always a dumb race and not the right strategy for building long-term wealth.”

The chartered financial analyst, who has worked as a financial advisor for more than two decades, had simple advice for people worried about their 401(k): “Keep calm and invest!”

“[K]Keeping the right perspective and taking the right actions can help ease investors’ emotions on this difficult journey,” she said. “Don’t worry about the day-to-day fluctuations in your portfolio – keep your long-term goals in mind and understand that time and time again the market has proven its ability to rise from the ashes (and beyond) over time. time. .”

Nelson argued that investors, and especially young investors, should focus on finding quality stocks at reasonable prices when the market drops, instead of selling to try to avoid further losses.

“I think buying today is a better time than eight months ago, and if you’re a long-term investor, buying quality names at today’s prices and continuing to add to your portfolio each month could put you on the path to a successful future,” she said.

Cameron Starr, wealth adviser at Gratus Capital, echoed Nelson’s comments.

“We think it’s important to weather the market reaction by selling and going cash,” Starr said. Fortune.

He thinks stock and bond markets will eventually recover from their year of decline, which means most long-term investors will never realize the current losses on their 401(k) holdings unless they sell now. .

On top of that, he noted that those who sell stocks to hold cash aren’t just hurt because of a bear market – they also lose about 8% of their money to inflation, and losses 401(k) can’t be used to offset taxes.

The IRS will also impose a 10% penalty on any money withdrawn from a 401(k) account before age 59.5, which can end up being quite expensive.

“While it is stressful to watch assets dwindle, you have the ‘forced’ luxury of time and the potential recovery of those assets. Give your portfolio time to potentially recover, and if you have the ability to continue investing with any excess cash, do so,” Starr recommended.

Advice for retirees

For those approaching retirement, falling stock and bond markets can be particularly devastating.

Starr of Gratus Capital said it makes sense to reassess your risk tolerance as you approach retirement, saying it might be wise for older Americans to invest more conservatively.

He recommended looking at target date funds that automatically reduce portfolio risk as you approach retirement. For someone planning to retire in 2045, for example, a target date fund would invest in a higher-risk portfolio that offers more opportunity for long-term gains early on. Then, over the years, the portfolio would automatically readjust to a less risky allocation.

But for retirees who fear the market will continue to slide and are looking to protect their savings now, Morgan Stanley Wealth Management shared some advice this week.

“Consider using bond market volatility to lock in strong near-term returns while waiting for the stock market roller coaster,” chief investment officer Lisa Shalett wrote in a research note Monday.

Yields on one-year US Treasuries soared to more than 4% on Wednesday. That’s more than 10 times higher than they were in January. Investors can protect some of their retirement savings from inflation and stock market losses by using short-term bonds like these, Shalett said.

Positioning for a choppy market

While wealth management experts believe you should almost never withdraw money from a 401(k) and most recommend not decreasing your contributions even if the market is having a down year, many investors always decide that enough is enough.

A new survey from Morgan Stanley found that 31% of Americans plan to cut contributions to their 401(k) plans this year.

If you’re in that camp and have some extra money to invest this year after cutting your 401(k) contribution, UBS Global Wealth Management Chief Investment Officer Mark Haefele has some tips for you. help make the most of the hustle and bustle. markets in a Wednesday research note.

First, he recommended increasing exposure to value stocks – or stocks that trade at lower prices based on fundamentals such as earnings, earnings or net income than their peers.

“The combination of higher inflation and rising interest rates tends to favor an allocation to value stocks over growth stocks,” Haefele wrote.

According to UBS research, value stocks have outperformed growth stocks by more than 4 percentage points in the 12 months since the Federal Reserve’s last interest rate hike in previous business cycles. And with inflation showing signs of peaking, many experts believe the Fed could pause rate hikes later this year or early next year, setting value stocks up for a strong rally.

Second, Haefele recommended investors look to energy stocks for near-term gains as he expects oil prices to rise above $110 a barrel by the end of the year, which should support a ” new rally” of these names.

The CIO went on to say that investors could also consider adding “defensive exposure” to consumer staple stocks and “safe haven” currencies like the Swiss franc.

And finally, he argued that “uncorrelated hedge fund strategies” are likely to outperform the market as a whole in the future, and said investors can use funds that combine multiple hedge funds, like the HFRI Macro fund. , to gain exposure to the sector.

“An environment of high inflation and rising rates has led stocks and bonds to move together, with both down year-to-date. But this challenging environment for ‘traditional’ diversification has favored funds hedge funds, particularly macro funds, which are able to take positions in markets, instruments and asset classes in order to navigate changes in the macro environment and heightened uncertainty,” Haefele wrote.

Avoid obsessively checking your account balance

It can be hard not to look at your 401(k) when your account balance seems to be shrinking every day, but experts say checking your balance too frequently can lead to bad decisions.

“In my opinion, there is no value in checking your account daily,” said Nelson of Coastal Bridge Advisors. Fortune. “I don’t even think you should watch it even on a weekly or monthly basis. Long-lived assets should be reviewed quarterly at most. Watching your 401K go down each day the market goes down can make you more sensitive to the emotional decisions you’re trying to avoid.

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