It’s easy to say that you should save as much as you can while you can. But when fear rules the roost, that maxim flies away.
There’s a much simpler way of dealing with today’s markets. Act like it’s 2019. The market went up and you were probably not thinking about it. Money came out of your paycheck and was automatically invested in your 401(k).
When it comes to investing, the right behavior is counter intuitive. It’s best not to think. You will not be able to discern what’s going on in markets. Machines are doing the trading and there’s too much going on for one brain to decipher anyway.
Why focus on 2019? There was no drama and most 401(k) and retirement investors weren’t distracted. Only a handful made radical changes, according to the Investment Company Institute:
“Most plan participants stayed the course in their asset allocations, as stock values rose during the first nine months of the year. In the first three quarters of 2019, 7.1% of plan participants changed the asset allocation of their account balances, and 4.2% changed the asset allocation of their contributions.”
I know. This year is very different. Still, some of the most durable rules apply. Here’s what not to do:
Withdraw Money. I know some people think their 401(k) is an ATM. It’s not. The early-withdrawal penalties for taking money out before age 59 1/2% are 10% plus your federal marginal income tax rate. If you’re in the top bracket (37%), that’s a 47% total hit from Uncle Sam. You want to give away nearly half of your money? This is a good way to do it.
Get A Loan. I’m back to the ATM concept. Even if you take out a 401(k) loan, it comes out of your retirement kitty and you may never pay it back. You’ll lose the benefit of compounding and have less for retirement. And if you change employers or leave, you have to pay it back — or pay taxes (see #1 no-no above).
Dramatically Change Your Portfolio Mix. Sure, you may want to sell your stocks and go to all cash or bonds. When were you planning to get back into stocks? Can you afford to lock in a loss? How would you even know when it was “safe?”
Make your portfolio mix appropriate for your age and career. You can take on more stock risk if you’re under 50. Or just make it simple: Invest in a target-date or “lifestyle” portfolio. They pick the mutual funds for you.