For individual investors, the quick-turn global rout in stocks on Monday was unsettling, even with news Tuesday that there is somewhat of a bounce-back going on.
Expectations that volatility will continue for the foreseeable future may be unwelcome.
But if you’re investing in a 401(k), daily market dramas are no reason to take dramatic actions with your portfolio. Not only are down days and periods of volatility normal, they can create good buying opportunities for the managers of the funds in which you’re invested. “It’s important to remember pockets of opportunity are always on the other side of the storm,” Quincy Krosby, chief global strategist at LPL Financial, said in a statement.
Andy Smith, executive director of financial planning at Edelman Financial Engines, puts it this way: “Separate your emotion from your money. There will be days when the market is up and days when it’s down. Focus on your time in the market rather than trying to time the market.”
His point: It’s impossible to know the best time to get out of the market and then the best time to get back in.
As a 401(k) investor, the best thing you can do is to save as much as you can, diversify your holdings to minimize the risk and volatility in your portfolio, and rebalance your holdings if your chosen asset allocation gets too far out of whack, Smith said.
Checking to see if you need to rebalance your portfolio is something you should do at least once a year anyway – but many of us never do.
Say you set up a portfolio of 70% stocks and 30% bonds but now it’s morphed into a 60/40 portfolio. If 70/30 is still the right allocation given your goals and time horizon, you can direct your 401(k) administrator through your plan’s online portal to rebalance your holdings accordingly.
And remind yourself periodically that even bear markets have not stopped the long-term increases in stocks over time. For example, the S&P 500 has risen more than 80% from August 5, 2019 through yesterday. And since 1960 there have been far more positive annual S&P 500 returns than negative ones, Smith said.