The One Question to Ask Yourself About Your 401(k) When Stock Indexes Are Dropping

Retirement Tip of the Week: Advisers typically advise their clients and all individuals to remain calm during market volatility, but that’s easier said than done when you see your hard-earned dollars trending downward. Don’t make any drastic moves, but do take stock of your feelings during this event – then be ready to talk about it. 

Panicking and making any sudden changes to your portfolio won’t help your retirement savings – in many cases, doing so would actually hurt your future prospects. It’s important to remember that while it looks like you’ve lost money during a market downturn, that actually isn’t the case unless you were to withdraw or make extreme shifts to your asset allocation. When you sell during a downturn, you’re making those losses official. 

See: Whether you’re retiring 30 years or 5 years, you still need to do this one thing religiously 

Still, sitting there and watching the numbers tick down in bright red isn’t exactly calming, and not always avoidable to watch. Although advisers often suggest individuals not check their accounts too often – especially when the market is acting up – it isn’t always an option for someone sensitive to these fluctuations. 

While you shouldn’t make any actual changes suddenly, write down how you’re feeling during this moment and take note of how much of your portfolio has been “lost” to the downturn. For example, if you have a $1 million portfolio and have lost $10,000, that’s 1% of your portfolio. This will be an important talking point when the market stabilizes and you have your next conversation with a financial adviser. 

Ask yourself: How am I feeling right now? How would I feel if my account balance were to bounce back in just a day or two? What would I most likely feel if it were to stay this way for a while? Can I remain calm in the future during a downturn or do I need to change how much risk my portfolio actually has? 

Portfolios are created with numerous variables in mind, such as time horizon and target amount, but they aren’t always created during moments of market volatility. For more than a decade, the markets have been trending mostly upward and investors have been riding the highs of a bull market. With this recency bias, it’s easy to forget how it feels when things shoot down… even if those moments are temporary.  

Portfolios might also be made with risk capacity in mind – that’s how much risk an account is capable of handling in order to meet goals – but that measurement isn’t always aligned with an individual’s risk tolerance, which is how much they can emotionally handle. 

Investors may be asked to fill out a risk tolerance questionnaire before having their portfolios set up, but they may not be fully aware of how much risk they can actually tolerate until the market makes serious movements. It can be hard to assess how market movements make someone feel until the event actually happens, so while filling out the paperwork they may feel more confident about how they stomach volatility. 

After assessing how this volatility actually makes you feel, talk to an adviser or a qualified representative at the investment firm housing your retirement savings, and ask them what would be the best options for meeting your needs and goals but with less risk. You may have to shift your perspective a bit to keep your target in place – that could be working a little bit longer to make up for less risk, or adjusting your goals a tad – but it could help you sleep better at night in the years leading up to retirement. 

Try these hacks in the meantime too: avoid checking your account regularly, keep any losses (and gains) in context with how much your total account balance is worth and how much time you have until you will actually begin withdrawing and try the R.A.I.N. model, short for “Recognition, Acceptance, Investigation and Non-identification.” And try to remain calm – market volatility is normal.

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