Average 401(k) balances are down more than 20% this year. Experts tell you what you should do to weather a volatile market

“Many 401(k) account balances are going down because the largest asset classes (stocks and bonds) are down double digits this year,” said Herman (Tommy) Thompson, Jr., board-certified financial planner at Innovative Financial Group. “In addition, economic difficulties, such as rising inflation and job cuts, have forced some participants to borrow and pay out at the worst possible time – when markets are down.”

The do’s and don’ts of investing in a volatile market

So how should you deal with fluctuations that could affect your retirement savings? This is what the experts suggest:

1. Keep calm and keep saving. Yes – even when things are rocky, you should keep saving for retirement, and most savers are taking note. According to Fidelity, the average 401(k) contribution rate, including employer and employee contributions, remained at 13.9%. In fact, the majority of workers (86%) left their savings account contributions unchanged, and 7.8% even increased their contribution rate.

   Investing in your 401(k) is a form of dollar cost averaging, which is an investment strategy that requires you to invest the same amount at set intervals, no matter what. One of the biggest benefits: This approach takes the emotion out of investing and ensures you don’t make sudden moves that could end up costing you even more. “It’s best not to panic about near-term weakness: it gives the long-term investor an opportunity to invest in future contributions at lower prices,” said Karl Farmer, CFA, vice president and portfolio manager at Rockland Trust. Another advantage of staying the course: employer contributions. By investing consistently over time, you can be sure to benefit from employer contributions and grow your bankroll.

2. Do not borrow money from your 401(k). If you can avoid it, you should try to avoid borrowing your 401(k). While only 2.4% of savers took out a new loan in Q3, major changes in your account balance or changes in your financial situation in a tough economic climate could prompt you to draw on your 401(k) funds. Most experts would agree that this isn’t the wisest long-term plan. Borrowing from your future self comes with its own set of risks, such as taxes, penalties, high interest rates, and losing the potential growth you would have seen if you left your money alone.
3. Avoid impulsive changes in your investment mix. Perhaps you should hold off on major changes to the mix of assets you invest in. “Retirement savings plans like 401(k) accounts should be managed for the long term,” says Thompson. “Reducing risk after your portfolio has already suffered a double-digit decline usually leaves the portfolio under-risk when markets recover.”

take that away

If your investments are making you uneasy, take a break. Fixation on short-term, daily market fluctuations could lead you to act impulsively and make a move you’ll regret later. Keep saving for retirement and check your portfolio regularly to keep track of your progress.

“At least every year, or in volatile markets, investors should review their allocations to make sure they’re still in line with their targets,” says Farmer. “For example, in spring 2020, many investors had an opportunity to reduce exposure to bond funds and replenish weakened equity allocations. The rebalancing should be done at least annually.”