3 Strategies for Market Volatility and Your 401(k)
The markets have been in roller-coaster mode this week, as Ebola panic is spreading and regular investors are left wondering what to do with their 401(k) investments.
With the recession of 2008 fresh in the minds of many, particularly those who saw their retirement savings get wiped out just as they were gearing up to retire, fears are reverberating that history is set to repeat itself. As of Thursday, the Dow Jones Industrial Average closed lower for the sixth consecutive day, marking the longest period of losses in 14 months. It opened in the green on Friday, riding on new hopes that the Federal Reserve would again fill the QE punch bowl.
Money managers are viewing this volatility as a signal that it’s time to go shopping.
“If your goal is still long term, then don’t panic,” says Mark VandeVelde, a financial advisor at Hefty Wealth Partners. “This is a normal correction. It’s healthy and natural for the market to do this.”
Improvements in the economy, growing corporate profits and a job market somewhat on the mend, not to mention accommodative monetary policies from the Federal Reserve, has helped lift stocks higher in the bull run of the past five years.
But like with most bull runs, the upward trajectory has to end sometime, and over the last few days we’ve seen a retreat driven by a mixture of geopolitical woes, slowing European economies and fears about the Ebola outbreak. It doesn’t hurt that the U.S. is in the throes of the mid-term elections, which historically pressures share prices.
Bargains abound in stocks--go shopping
Although stock investors are suffering from near-term losses, for people who have their money in their 401(k), the recent declines may present some opportunities to make money.
“We think the fundamentals are pretty sound and therefore we are not just saying hold and take it but be active,” says David Richmond, founder of investment firm Richmond Brothers.
According to Richmond, in a period where stocks are reaching lows or setting new ones, investors should consider moving some retirement investments from more conservative allocations to equities. He isn’t saying to go out and buy individual stocks, but rather allocate more money in your 401(k) to a stock fund instead of, say, a bond one.
The key, noted Richmond, is to take the gains when the stocks start setting new highs, and put that back into a stable value fund.
“You want to grow the account balance and make sure you are growing a safety net,” says Richmond. “You need to actively manage [your 401(k)] but don’t be a day trader.”
Look for opportunities outside of the usual suspects
Many investors who are looking to increase stock exposure will shift some 401(k) money into an S&P 500 Index Fund, but VandeVelde of Hefty Wealth Partners says there are other equity index funds worth considering.
“Small caps are down almost 10% year-to-date, and international is negative for the year,” says VandeVelde. “They may be better buys right now than even large cap stocks.”
While you may not think you have any money to add to your 401(k), VandeVelde says people who already made more than $117,000 can find an extra 6.2% to invest in the stock market, at least for the next couple of months, to take advantage of the bargains. That’s because you stop paying into Social Security when your income hits $117,000, in essences giving you about 6.2% more each pay check. Instead of spending it, VandeVelde says to contribute it to your 401(k) and increase your holdings of equities.
Stay your course and do nothing
For investors who are already invested in stocks via their 401(k), and have already maxed out their contributions, the best action is to do nothing, says Jeff Reeves, editor at Investorplace.com and author of “The Frugal Investor’s Guide to Finding Great Stocks.”
“401(k) investors have absolutely nothing to worry about. Even if you are on the cusp of retirement, the short-term impact on market volatility should never significantly alter your investing strategy,” says Reeves. “The stock market is flat on the year for Pete’s sake. This is not the end of the world, so just relax.”