As part of N2’s team member benefits, we provide access to a financial advisor to guide our people through their personal financial wellness journeys. This week we received great advice from our financial advisor, John Zachary of Pathfinder Wealth Consulting, on how to react to a volatile market like the one we’re currently experiencing. Instead of keeping this advice close to the chest, we figured we’d share it with others who may need some expert guidance as well. Enjoy!
Things You Should (and Shouldn’t) Do With Your 401(k) During Periods of Stock Market Volatility
If you have looked at your 401(k) account recently, you might have noticed that your balance has taken a hit this year. As of June 30, 2022, the S&P 500 stock index, which is made up of the largest 500 companies in the United States, was down 20.58% since January 1. The Nasdaq Composite, which tracks more than 3,700 technology and growth-focused companies, was down a staggering 29.51%.
These drops can be attributed to a variety of factors. However, the main culprits are historically high inflation readings (an abnormal rise in the prices of goods and services) and the Federal Reserve‘s decision to aggressively raise interest rates in an effort to slow the economy down and get inflation under control.
Higher interest rates are meant to discourage consumers from spending. When consumers spend less, there’s less demand for goods and services, which can, in turn, result in lower prices (and a slowdown in inflation). It’s a fine line to balance; if it takes too long to get inflation under control, we potentially could be pushed into a recession.
So what should you do? The answer, in short, is nothing.
Stock market volatility is a normal part of investing. It’s not fun, but it’s necessary.
There is a natural human impulse to do whatever we can to stop the bleeding. During volatile times, I tend to get questions such as: “Should I move my investments to cash to wait this out?” “Should I reduce my contributions?” “Should I stop making contributions entirely?”
I would encourage you to think of it in a different way. You might have heard the phrase, “Buy low and sell high.” That applies here. When the stock market is down, it gives you an opportunity to buy in at low prices.
Who doesn’t like to buy things when they’re on sale? By continuing your contributions to your 401(k), you will be scooping up stocks at a discount, which will allow you to bounce back even faster when the market recovers.
Unfortunately, many people do the opposite with investing. They buy into stocks after those stocks have performed well (i.e., buy while prices are high) and sell after those stocks have not performed well (i.e., sell while prices are low).
Don’t be that person! Historically, the stock market has had nothing but temporary declines. The only ways people lose money in the stock market are by either putting all their eggs into one basket (i.e., buying one stock that goes bankrupt) or selling when stocks are down.
It’s worth noting that all the investments in the 401(k) are broadly diversified and back-tested to ensure that when the market bounces back (which it will), they will, too. They are “pooled investments,” which means there are hundreds, if not thousands, of individual investments in each fund. This spreads the risk among many companies.
Bottom line: It’s usually best to avoid making drastic changes to your 401(k) or investment strategy during volatile times (unless it’s to increase your contributions!).