Worried About Your 401k Going Down? Here’s What You Should Do

401k going down

In 2022, we are experiencing a pretty significant decline in the stock market’s overall value. The Dow Jones is down over 21% in mid-October, and the S&P 500 is down over 25%. Lots of people are worried about their 401k and other retirement account values. And rightfully so.

In these situations, it’s important to make wise decisions to protect yourself. Some time ago, I wrote an article on how to prepare for an economic recession. At this time, we most certainly are in a recession (in spite of certain politicians’ word games). The full brunt of it simply has not yet caught up fully in our daily lives.

This time I want to specifically talk about your 401k and retirement accounts. A lot of people are scared about their long-term savings with the current state of the market. So let’s talk about it.

“What’s Happening to My 401k?”

Your 401k and IRA contain various investments you have purchased over the years. Many 401k plans have target-date funds as a default investment choice for contributions. But you may choose your investments as you wish based on what the plan offers.

Your IRA will largely enable you to buy any publicly traded security on the market. After you make contributions, the impetus is on you to buy these securities to allow your money to grow.

But these accounts don’t just grow 100% of the time. Sometimes there are drops in the value of your retirement accounts. You may have heard this referred to as a bear market, when a certain drop in value takes place.

Since the market’s bottom during the Great Recession, the market has largely gone up, with a few dips here and there (including in 2020). But the overall trend has been clearly upward almost all of the time.

Right now, though, we are in a bear market. This means a stock or market index has dropped 20% or more from a previous high. Both the Dow Jones and S&P 500 have reached that point.

“What Can I Do To Protect My Retirement Investments?”

recession 401(k) retirement investing

All of the technicalities of this economic phenomenon mean one thing for you—looking at your 401k will hurt. And there will be a strong urge to do something to protect your retirement investments.

This is where I need you to listen very carefully.

Please, do NOT pull your money out!

Do NOT sell the investments in your retirement accounts!

Do NOT lock in your losses!

If you do the things your emotions tell you to do, you will make the wrong decision. Your emotions are very real and we need to acknowledge them. But what you feel is often not informed by the bigger picture.

Do you remember back in 2008 when the news was full of stories about people losing everything? It’s true this happened to many people.

But there’s a reason for that—they sold at the bottom!

They did the opposite of what a good investor does. They bought high and sold low.

You Only Hurt Your Future Self by Selling Now

I know it hurts to see the balance of your 401k and IRA go down. Believe me, I get it. But jumping out while things are going down will only lock in your losses.

The market has always come back when looking at things long-term. Even in 2008, it took only about 2 years for the indices to rebound to where they were before the drop. Over the next decade, the market nearly tripled in value.

Those who rode the wave down and back up again came out ahead. Those who prepared themselves well bought more while the market had a sale, and took advantage of the decade-long climb upward.

But the ones who sold or pulled out from their 401k and IRA investments at the low points lost in two ways. First, they locked in the loss in value. Second, they prevented themselves from realizing the gains they would have gotten if they remained invested.

Odds are, many people lost hundreds of thousands of dollars in potential value by jumping out in the Great Recession.

Please, don’t repeat their mistakes!

Final Thoughts on Protecting Your 401k

The bull market of the past decade-plus was not going to last forever. Nothing ever does. The general trend is toward growth. But there are times when things go down and our 401k and IRA take a short-term hit.

Human psychology explains why we feel these losses the way we do. Our brains operate in such a way that we feel a negative stimulus more strongly than an equal positive stimulus. Put another way, it feels worse to lose a dollar than it feels good to gain a dollar.

The gains of the past decade have been good. But the losses of the past year or so hurt a lot. The critical thing is to keep long-term trends in mind. The market eventually comes back. You won’t lose “everything” if you don’t sell at the low point.

The wealth mentality sees the current market as an opportunity. The poverty mentality sees it as an apocalypse. The mentality you take toward this current situation will determine your reality.

Choose the wealth mentality, and achieve the wealth reality.

(Last updated October 13, 2022).

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