The stock market bull run of the past few years has created more than a few 401(k) millionaires. But with economic headwinds increasing, many investors are getting nervous about just how long they’ll remain 401(k) millionaires.
Investors who have made lots of money in recent years are aware that a stock market crash could wipe out their wealth just as easily as the bull market grew their wealth. And many of those who remember 2008 are worried that the next crisis could be just as bad as 2008, or even worse.
The financial crisis saw many people lose significant portions of their savings and investments, investments they had worked years or even decades to build up. Many lost over half their savings as markets plummeted as a result of the financial crisis.
Those investors don’t want to see a repeat of 2008, and they want to do anything they can to avoid making the same mistakes. But with so many investment options out there, what’s the best way for investors to protect their 401(k) assets from losing value in the coming years?
Here are three things to think about when it comes to protecting your 401(k) assets.
1. Don’t Stop Contributing to Your 401(k)
Many people who contribute to 401(k) accounts may think that cutting off their 401(k) contributions during a crisis might help them financially. But that isn’t necessarily the case, so if you’re still working and contributing to a 401(k) plan, it’s important that you not stop contributing to your plan, with a few caveats.
We’ll assume that, like many Americans, you have employer matching contributions. We’ll also assume that your 401(k) plan offers investment options that aren’t limited just to funds that invest only in stocks.
Because of employer matching contributions, you essentially get free money to invest. In many cases that can double the amount of money that you’re investing in your 401(k) plan.
By pulling back on your 401(k) contributions you could be putting those employer matches at risk, costing yourself a lot of money that you could be profitably investing. You would essentially be leaving money on the table.
Most 401(k) plans offer a variety of investment options in funds that invest in stocks, whether that be large-cap, mid-cap, or small-cap funds. But many will also offer investments in bond funds, money market funds, etc.
If your 401(k) plan offers those, especially money market funds, those can be a useful place not only to store your existing 401(k) assets until you decide what to do with them but also to place your future contributions, at least temporarily.
Many people have a tendency to buy high and sell low. It’s one of the types of behavior that you see a lot during speculative manias, stock bubbles, and then stock market collapses.
People get sucked into the market when prices are nearing all-time highs, thinking growth will continue forever. Then when the collapse comes, they get disillusioned, think they’ve made a mistake, and sell out at the bottom.
What they need to do is get out at the top and get back in at the bottom. But that’s easier said than done, and it requires both diligence and control over fear that not many people have.
That’s why continuing to contribute to your 401(k) but placing your assets into safe havens is comparatively easier. In doing so, you can miss out on big losses, maintain your wealth, and position yourself to come out safely during the upswing.
2. Reduce Exposure to Volatility
Market timing is notoriously difficult, and in many cases picking both the top and bottom of a market cycle has more to do with luck than skill. And that’s why reducing your exposure to volatility can be helpful.
Many investors start seeing stocks decline and think that they’ll recover. Only when it’s abundantly clear that markets are in a nosedive do they finally accept the reality that their stock investments won’t recover. And then they make the mistake of selling at the bottom, locking in losses and missing out on the gains that occur from a rebound.
The temptation to wring every last penny of gains is a great one. But sometimes you have to know when to minimize your risk and your exposure to volatile financial markets.
Sometimes sitting things out or remaining on the sidelines can be the better choice. And when things start to look risky, as is starting to happen today, that could be the right time to start thinking about reducing your exposure to volatility.
3. Diversify Your Portfolio
One way to reduce your risk exposure is to diversify your portfolio so that you aren’t overexposed to one particular company, sector, or region. In other words, don’t put all of your eggs in one basket.
For many people this has traditionally meant that they invest in a mixture of stocks and bonds. When stocks are booming they increase their holdings of stocks, and when stocks decline they increase their holdings of bonds.
But what happens when both stocks and bonds decline? We saw that most recently in 2022, as both stock markets and bonds markets saw large declines.
With the performance of financial markets being highly dependent today on what the Federal Reserve ends up doing with regard to monetary policy, investment decisions have to take that into account. And with the Fed now having to decide between cutting rates or keeping them elevated for longer, no one really knows how markets are going to react or perform over the next few months, let alone the next few years.
That uncertainty about the future is alarming to many Americans, and understandably so. And that’s why so many people are starting to diversify their portfolios with gold.
Gold has a long history as a safe haven asset and store of value, as well as a reputation for maintaining value through both good times and band. Millions of people rode out the 2008 crisis watching their 401(k) balances plummet, all the while watching gold rise in value.
Even in the aftermath of the crisis, gold continued to grow, setting all-time highs in 2011. After seeing that performance, many people undoubtedly vowed that the next time around they would invest in gold to protect their assets, and so they have.
With a gold IRA, you can even roll over or transfer assets from existing 401(k), 403(b), TSP, IRA, or similar accounts into gold tax-free, allowing you to protect your current retirement savings while still benefiting from the same tax protections that you would enjoy with any conventional IRA. That can help you protect your assets without having to worry about taking a huge loss from markets plummeting or a huge tax hit.
If you’re worried about the coming recession and want to protect your 401(k) assets, now is the time to start thinking about that protection. Waiting too long puts you at risk of losing significant amounts of money when the recession finally hits.
Don’t leave your retirement savings at risk – make the first moves to start protecting your assets today, before it’s too late.
This article was originally published in December 2019 and was updated in May 2024.
