Should you try to time the market with your 401(k) or should you let your retirement funds weather the storm?
Your 401(k) funds should be invested for the long haul – they are meant to see you through retirement. This means they are very likely going to see both ups and downs along the way. The key is to keep those funds there and to let them fight through the storm.
Why You Shouldn’t Time the Market
Many people think you should try to time the market because you can be ‘in’ when the market is good and ‘out’ when it’s bad. Here’s the problem, though. When you are not invested, and the market has an unexpectedly positive day, you miss out on those earnings.
Predicting market movements is essentially impossible. You could pull your funds from your 401(k) when the market is down, but how do you know exactly when to put them back? The opportunity cost of missing out on a market surge is too great.
Using the Buy and Hold Strategy
So should you buy investments and hold them for the remainder of your portfolio? It’s not that simple. While trying to timing the market isn’t the best idea, neither is buying and ignoring. All portfolios require a checkup at least once a year. Your risk profile can change from year-to-year, and even automatic investments like mutual funds may produce dividends that are returned to your portfolio as cash (and should be reinvested).
Your 401(k) is there to see you through retirement. If you buy and hold the same investments from the time you’re young until you reach retirement age, you may be unpleasantly surprised at your balance. Instead, you need to adjust with the times. The further you are from retirement is the time to be aggressive. As you near retirement age, though, you may want to pare down a little bit, reducing the aggressiveness of your investments to keep your losses to a minimum since you have less time to make up for a loss.
What are your Long-Term Goals?
Your 401(k) is your nest egg for your retirement, not something to mess around with. If you want to try your hand picking stocks, open a brokerage account separate from your 401(k). Retirement savings should have an asset allocation that meets your risk tolerance at the time as well as your long-term goals. What do you plan to achieve in retirement? How much money will it take to reach those goals?
Set your 401(k) up so that it accounts for your risk tolerance and sets you up for retirement. Unnecessarily frequent changes to your asset allocation can eat away at your profits through commissions. Let your 401(k) sit, changing it periodically as you near retirement age, but don’t try to time the market with it.