Are you wondering if there is anything you can do about your 401(k) that would curb some of the loss? If you answered yes, rest assured that some things are still in your control.
This is a perfect time to reassess and follow through with tested investing strategies that can help you and your portfolio to come through this difficult time on the other side. Let’s go through 4 things you can do about your 401(k) right now.
1. Determine Your Actual Risk Tolerance
Has the drop in the market made you question how much risk you are willing to take? Depending on your financial situation and what age you hope to retire at, your true risk tolerance is being tested right now.
Now is the time to sit down and assess if your money is properly diversified and how your assets are allocated. Ask yourself, “Are all my eggs in one basket?” and “What percentage of my assets are in high-risk investments?”
In the most basic form, diversification is making sure your investments are in a combination of stocks, bonds, cash, real estate, and other asset classes—not all tied up in single stocks or one kind of investment. Asset allocation is how you assign what percentage of your portfolio is in higher-risk investments versus lower, depending on what you decide you are comfortable with.
2. Consider A Roth Conversion
One way to take advantage of low values in your 401(k) is by converting money from your traditional 401(k) account into a Roth 401(k). Normally you would need to pay taxes on the gains in your traditional 401(k) since contributions are made with pre-tax dollars, but since the values are down, it alleviates the amount you’ll have to pay in taxes at the end of the year. When you do this, money in your Roth grows tax-free, unlike money in your traditional 401(k) that will be taxed when you start taking withdrawals in retirement.
3. Buy On Sale
While it may feel counterintuitive, any money you put into a down market means you are buying stocks at a discount. We don’t know when these “sales” will happen and how long it will take to see the benefit of our purchase, but history tells us that it’s only a matter of when, not if it will happen. This is a graph of the S&P 500 Index over the last 20 years to date, which is a benchmark representation of the stock market. Based on the long track record of the market going up, regardless of the down markets we’ve had, this should encourage you to confidently buy and also to follow #4!
4. Look, But Don’t Touch
Ironically, just like health officials encourage you to not touch your face, I encourage you to not withdraw funds from your 401(k). As you can see from the previous points, there are many ways you can increase your portfolio in the long run and minimize risk at the same time without taking money out of your retirement. What most people don’t understand is that the only time you are guaranteeing you lose money is when you buy high and sell low, which is what would happen right now if you withdraw from your investments.
I understand this pandemic has some in a tight spot financially, and if that is the case, let’s assess what the best options are for you moving forward.
Make Sure Your Accounts Are Set Up For Success
Taking advantage of these options could set your retirement up for success, regardless of how volatile the markets are over the next few months.
At Match Point Financial, we provide everyone with a complimentary, no-strings-attached meeting where we discuss your questions, concerns, and goals, as well as our process in working with clients so we can see if we’d be a good match. Contact me by calling 352-207-8014, schedule a complimentary phone call or send a message here.
Chris Reed is a financial advisor and the founder of Match Point Financial. Since 2002, he has been helping people make informed choices with their money and pursue their financial goals and objectives. He started his career with MetLife and has continued seeking to provide his clients with the best possible service through A.G. Edwards, UBS, and finally through partnering with Cetera Advisors LLC and forming his own independent firm in 2010. Learn more about Chris by connecting with him onLinkedIn or register for his recent webinar“Are Your Old 401(k)s Collecting Dust and Losing You Money?” here.
The views stated in this piece are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. The S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Distributions from traditional employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty. Converting from a traditional account to a Roth account is a taxable event.
Asset allocation, which is driven by complex mathematical models, cannot eliminate the risk of fluctuating prices and uncertain returns. Asset allocation should not be confused with the much simpler concept of diversification. A diversified portfolio does not assure a profit or protect against loss in a declining market. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.