When to Make Changes in your 401k
Moving Your Money Between Investments in your 401k
If you are retired or close to retirement and the economy is in a recession, you may be watching the stock market fall and your retirement portfolio fall right along with it. The important thing is not to panic. Many retired investors will panic and move money from investment to investment within their 401k in search of safer investments. There is nothing wrong with moving money between investments in your 401k. In fact, the closer you get to retirement, and certainly after you retire, you should move money to safer investments. However, timing is everything.
When to Move Money
Remember the investment adage – buy low, sell high. You do not want to sell your stake in one investment when it is at a low price. If the drop in the stock market is sudden and you have no warning, just hang on. Do not sell your investments in riskier securities to invest in less risky assets when the value of your investments is falling. It is very difficult to watch the stock market fall or fluctuate day after day, and see your financial summaries for your 401k fall month by month, without doing something. You don’t want to sell at a loss unless you absolutely have to. Wait until the market rebounds and you can sell your investment in the riskier asset at a price equal to or above what you bought it for. If history is any indicator, the market will rebound, though it may take awhile.
The stock market is usually a leading indicator of economic activity. As the economy starts to recover, the stock market will lead that recovery and will actually recover before the recession ends. As the stock market recovers and the value of the risky assets in your 401k rise, then you can sell them and move the money to safer investments.
Where to Move Money
As you move closer to retirement or if you are already retired, some percentage of your retirement portfolio needs to reside in safe investments. You can invest in money market accounts, certificates of deposit, or Treasury securities. Many retirees use Treasury securities as their safe investment as you can rely on a relatively stable return from that part of your 401k. As you move further and further into retirement, put more of your assets into the safer investments, particularly Treasury securities. You will usually get a higher rate of return from Treasury securities than you will from money market accounts or certificates of deposit.
Planning for the Future
In a falling stock market, remember that you will need all of your savings, plus interest and dividends, to fund your retirement in the future. Don’t make rash decisions out of panic. Wait out the market decline and then move some of your retirement savings to safer investments so the next time the stock market goes into a decline, you can rest easy.
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