3 Things You Should Do With Your 401k When The Market Tanks
Disclaimer: I am not predicting the market tanks tomorrow, next week, next month or even next year. Contrary to what the media or “pundits” try to convince you — it is impossible to predict when the market will drop or what will ultimately cause it. That said, I am 100% convinced that the market will drop at some point.
In fact, at blooom – we guarantee that it will drop at some point in the future. In reality, it isn’t IF the market will drop. It is WHEN and how many times over your investing lifetime will it occur. We try to inform our clients about this as often as possible and set the expectation that market drops – although painful at the time – are perfectly normal.
The mistake average investors make most often is they take the assumption that something is wrong with the market or their portfolio and they bail out of their investments right in the midst of the market decline. They do this thinking that they are doing the “safe” thing but it is often the absolute worst thing you can do. It is a huge reason why average investors perform so horribly when left to their own devices.
So what can you do the next time the market tanks? At blooom, we advocate that our clients do these 3 things.
1. Set Your Expectations Ahead of Time
Just knowing that it is perfectly normal for the market and the value of your account to decline from time to time is half the battle.
History has repeatedly shown that the right thing to do — regardless of the circumstances causing the market decline — is to not panic, sit tight and just get through it. You probably know that the average rate of return over the stock market over the past 30, 50 whatever years is something close to 10%. Guess what, the 10% rate of return was calculated by STAYING in the market 100% of the time. Even in the last 20 years (1997-2016), the average investor return – 2.29% — has paled to that of the S&P’s 7.68% 1.
Achieving the S&P historical numbers does NOT assume that an investor had a fully functioning crystal ball. They weren’t hopping out of the market before a decline and back into the market right before it turned upwards. That rate of return assumes you left your investment the heck alone!
Start prepping your mind today — when the waters are fairly calm — for the fact that your 401k will decline in value when the market drops. This does not mean anything is wrong with your 401k, the investments, or blooom! I promise you — after 22 years of experience working with clients to help them save for retirement — if you can come to grips and expect the market and your portfolio to drop from time to time, you will put yourself in a much better position for investing success.
2. Avoid Drowning in Negative News
When the market tanks, know that negative news will bombard you. The parade of “talking heads” across the various media outlets will come out calling for the end of the world.
The media will make a very strong case for why things will continue to get worse. So called “experts” on the market, people with PhD’s after their names, will espouse their deep concerns about the state of the market and the economy.
I get it. The more of this content you take in, the harder it will be for you to resist making knee-jerk, emotional (fear-based) decisions with your critical retirement savings. During the financial crisis of 2008-2009 (arguably the worst period in our stock market since the Great Depression), my clients — many of whom were either retired or hoping to retire very soon — were extremely worried. But…there was a very interesting correlation I witness first-hand. Anytime I had a chance to visit with my clients in-person or over the phone, it was like clockwork: The clients who confessed to being glued to the news for updates on the financial crisis were the clients that were the most scared and were the closest to jumping off the cliff.
So … Ignore Chicken Little “Experts”
These were also the same group of clients who would admit that they were checking the balance of their retirement account MULTIPLE TIMES PER DAY! Unfortunately, a few eventually hit the eject button and instructed me to sell them out of everything. Sadly, I am not sure if they every recovered from this decision. Because as is usually the case, they bailed out very near the market bottom (March 9, 2009). From there, the market started to slowly recover. It was recovering right at the very time that the news media was at its all-time worst. I am pretty sure that I even saw chicken little running across CNBC yelling “see, I told you so…the sky is indeed falling!”
Benefits of Avoiding Obsessive Account Stalking
Conversely, during this same time the clients that would say something along the lines, “yeah, we are concerned but we are trying not to pay too close attention to things,” were the ones that were significantly less wound up.
And guess what? In less than two years, their account values had recovered to the level they had seen before the financial crisis. And today, seven years later — their values are significantly higher.
Moral of the story? The news media does not exist to help you build wealth. They don’t exist to help you reach your retirement goals. They exist for one thing — to sell advertising. The news media knows that the more hyperbole they weave into their coverage, the more people are likely to tune in and watch. It’s kinda along the same lines as why people cannot help themselves from turning to look at a bad traffic accident while driving down the highway. Shock and awe is big business for the media.
Arm yourself by knowing this. When the market tanks, do not look to the media to help you manage your retirement nest egg.
3. Buy More When Market Tanks
When it comes to everyday things we buy as consumers we almost always look for a good deal.
I am a big Apple fanboy. So if the brand new MacBook Pro were to go on sale for 40% off for a limited time, I guarantee you I will be rushing to buy one (or two!). I don’t assume that the price drop means that something is wrong with Apple or the MacBook Pro. I just feel lucky that I caught wind of the sale.
But for many investors going it alone, their brains don’t work this same way when it comes to investing. Most folks see the stock market and their portfolio going down and they immediately assume that something is broken. Not only do they miss the “sale” in the market, they actually do something worse — they sell out of what they own!
At blooom, we try to coach our clients to think of market declines in the same way as a sale at Apple. You should try to re-wire your brain so your inclination when the value of your account drops is to potentially buy more.
How can you do this? If your budget allows, you should INCREASE your 401k contributions during times when the market tanks. This simple act will allow you to buy more of your investments at lower prices.
Isn’t that a good thing? But even if you are not in a position to increase your contributions, please, at a very minimum, do not sell.
Three Things to Hold On to When Market Tanks
So, the three tips for when the next market drop takes hold:
- Set your expectations ahead of time
- Turn off the news, and definitely … do not frequently check the value of your account
- Hang on at the least (buy more if you can)
Our blooom clients should know that they have access to a human advisor at blooom if they are ever feeling scared or starting to panic. We are here to provide some prospective and reassurances. We do not have crystal balls either. So, we will never be able to predict when the market will decline or when it will recover.
We just know — based on a lot of historical precedent — that riding out the storm has proven to be the best strategy.
- Investment Insight: Investing and Emotions Blackrock. June 2017. https://www.blackrock.com/investing/literature/investor-education/investing-and-emotions-one-pager-va-us.pdf
The S&P 500 index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation. We don’t control the investment markets.
The information is provided for discussion purposes only and should not be considered as advice for your investments. Your investments will go up and down in value based on what happens in the markets. We do not make any guarantees your investments will grow.
Prior to blooom he co-founded another investment advisory firm that grew to manage over $500 million for clients. At blooom, Chris leads the company in building innovative financial services to reach a brand new audience of under-served Americans. Blooom has been named one of the world’s most innovative companies by Fast Company, and Chris was selected as “Ten to Watch in 2016" by WealthManagement.
Latest posts by Chris Costello (see all)
- How to Travel Safely Down Retirement Yellow Brick Road - October 12, 2017
- Blooom Reaches $1 Billion in Assets Under Management - September 28, 2017
- What The Heck are 401k Fees and How Do You Kill Them? - September 18, 2017