If your 401(k) is losing money, it’s important to understand why, as well as consider how long you have until you plan to retire.
If you’re years and years away from retirement, you likely have time to regain that money in your 401(k)—remember, it’s a long-term investing strategy. If you’re closer to retirement, you may want to consider changing your portfolio’s allocation so that it’s invested less in risky assets (like stocks) and more in safer assets (like bonds). This could help prevent more losses to your 401(k).
Key Takeaways
- If your 401(k) is losing money, consider how much time you have before you plan to retire.
- If you’re closer to retirement, you may want to talk to a benefits manager or contact the brokerage to see if you can reallocate your portfolio so that it’s invested in less risky stocks.
- If you have a long time until you retire, you may be able to wait out the bear market and see your balance increase again.
- Diversify your portfolio for stability during market volatility, and consider taking advantage of down markets with dollar-cost averaging.
Why Would My 401(k) Lose Money?
Market volatility is part of every investor’s journey. But when markets move from bulls to bears, even the most stalwart investors may have some concerns. If you check your 401(k) balance frequently, it may seem that it’s bleeding money when the market is down. But before you panic, it’s important to understand why it’s losing money and how long you have until you retire.
Your 401(k) isn’t a savings account; it’s an investment account. It’s meant to be used over a long period of time to grow your money so that you can use it in retirement.
Your 401(k) will make money or lose money based on the strength of the stocks and mutual funds in which you invest. Your balance is likely to drop when the market drops, depending on what funds you’ve chosen. Since investments are not insured by the Federal Deposit Insurance Corp. (FDIC), there is no guarantee of growth. There is, however, a historical record of growth that can help calm fears of long-term losses.
Don’t Panic if Your 401(k) Balance Drops
The stock market is bound to go up and down, and you have historical data on your side. Historically, bear markets are shorter than bull markets. According to Edward Jones, the average bear market since 1950 has lasted 18 months, while the average bull market has lasted 54 months. The growth period is thus nearly triple the loss period. If you have time to wait, your money will grow.
Don’t Sell
The only way you lose money is by pulling your money out of the market at a low point. Instead, use dollar-cost averaging to continue investing through the highs and lows. You’ll buy more stock at lower prices as you continue to invest. When the prices rise, so will your balance, hopefully erasing the losses.
Diversify Your Portfolio
No matter what stage of life you’re in, there’s value to a diversified portfolio. Don’t just have a mix of stocks and bonds. Consider investing in international stocks or funds, as well as U.S. funds. You protect your overall balance by spreading your risk over different types of investments.
Tip
If you’re closer to retirement, you can consider allocating more of your portfolio to bonds and fixed-income assets than riskier investments like stocks. This may help cushion your balance as you near retirement age.
Ask for Help
Since 401(k)s are employer-sponsored, you may have access to a benefits manager—often at the company managing your employer’s plan. Ask for help analyzing your portfolio and assessing your risk. It may well be free. If you’re closer to retirement and don’t have time to wait for a market rebound, think about rebalancing your portfolio to hold more stable bonds rather than volatile stocks. On the other hand, you could live 20 or more years in retirement. You may want room to grow in at least part of your portfolio even then.
Don’t Look at Your 401(k) Too Often
If you have plenty of time for the market to rebound, consider skipping your daily portfolio check-in. Seeing repeated losses can shake your confidence and tempt you to take drastic measures to stop them. Instead, trust your long-term game plan.
Does a lower balance mean you have lost money in a 401(k)?
While your balance is reflected in monetary terms, it only shows the value of the account if you withdrew the money today. Since your portfolio is made of stocks, bonds, and mutual funds, your balance reflects the value of those instruments. As the market ebbs and flows, the value of those stocks, bonds, and mutual funds changes. If you keep your money in the market, it still has a chance to grow, gaining value by the time you withdraw it in retirement.
What is a bear market?
A bear market is a general term for when a market declines by 20% or more over two months. This term can apply to the stock market and individual securities and commodities.
How long does a bear market last?
A bear market can last any length of time, but since 1950, the average bear market has lasted 18 months.
The Bottom Line
It’s easy to advise investors to ride out market volatility. It’s more challenging if you’re watching your balance drop. Remember, as long as your money is still invested, it has the potential to grow.
If seeing your balance drop causes anxiety, and you have time to let the market recover, consider taking a break from checking your account. Consult your benefits manager or investment professional for more personalized advice if you’re closer to retirement.
