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Money Muse
Money MuseSteering Your 401(k) Through a Bumpy Stock Market
By Marko Tubic
Feb 28, 2002 -- The stock market has gone through some tough times over the past couple of years--and your 401(k) balance probably reflects this reality. What steps can you take to "perk up" your 401(k) account statements? Should you take any action at all?Before you start considering changes, it's important to realize that your 401(k)'s performance carries a significant emotional impact. After all, you may get a good percentage of your retirement money from your 401(k)--so if it isn't doing well, you might be understandably nervous.
And yet, you'll want to keep two things in mind before making changes to your 401(k). First, never make any investment decisions based on emotion--it's almost always a mistake. Second, remember that your 401(k) is a long-term vehicle. Therefore, unless your retirement is imminent, you shouldn't overly concern yourself with short-term performance.
Nonetheless, you still may want to adjust your 401(k) in response to the current market environment, but the changes you make may not be the ones that initially spring to mind.
For example, you might be tempted to move some money from equity accounts within your 401(k) to fixed-income choices, such as bonds, or even to "cash" vehicles, such as a money market account. By doing so, you reason, you'll reduce overall risk level.
But are you? While you may be lowering your short-term investment risk, you'll be incurring another, more dangerous, type of risk: the risk of losing purchasing power. Your fixed-income and cash instruments may not keep up with inflation, and although inflation has been low the past few years, it hasn't disappeared altogether. Over time, even a mild inflation rate can erode your purchasing power--and that can hurt you in your retirement years.
So rather than "going conservative" in your 401(k), you may want to take a totally different approach: Put more money in your plans equity accounts. When stock prices are down, your investment dollars will buy more shares, so you're actually buying shares "on sale." And if you're investing in good, solid companies, your perseverance should eventually be rewarded. As long as your employer's 401(k) plan has several different investment options, you should be able to find the type of high-quality stocks that meet your individual needs. Keep in mind, though, that equities are subject to market risk, including the potential loss of principal invested.
Of course, if you are within two or three years of retirement, then it may be a good idea to shift some of your 401(k) dollars into more stable, liquid investments. But, even then, you'll want some exposure to equities. You probably won't be cashing out your 401(k) completely when you retire, so you'll want the accounts to keep growing--and that means you need some stocks.
It's not always easy to "go against the grain" and put your faith--and your money--into those 401(k) accounts that may not have performed well. But, with patience and discipline, you can do it. A financial professional can help you review your 401(k) options. Ultimately, by making the right 401(k) choices, you can go a long way toward building the resources you need for the retirement lifestyle you want.
Marko Tubic is with the Fremont Edward Jones Office at 285-1777.
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