As featured in The Wall Street Journal, Money Magazine, and more!

Changing Your 401(k) in a Treacherous Market

This article was written by in Investing. 9 comments.

The Dow Jones Industrial Average, a measurement of the stock market at large, ended below 10,000 yesterday. That’s the lowest closing since 2004 and it’s quite a drastic change from a year ago, when the market closed above 14,000, the highest watermark for the Dow.

It’s tempting to just stick my head in the sand. I have been looking at my investment balances, though. While it’s hard to separate my emotions as my 401(k) balance quickly moved from about $50,000 to about $40,000 despite contributions, I try to keep in mind that my time horizon is decades in the future.

When the market is in turmoil, it should put asset allocation into the front of any investor’s mind. For people who have a long time before retirement like me, it’s not a good idea to run for cover. It might be a good time to ask yourself if you’ve accurately thought about your risk tolerance. It’s much easier to say you’re willing to accept more risk in return for a higher return over the long term while the market seems to be increasing without bounds. But if you freak out when you lose 20% on paper and consider evacuating your money, either you underestimated your ability to accept risk or you just need to work a little harder to separate your emotions from your financial decisions.

I’m sticking with my “aggressive” retirement portfolio of 100% stocks. My contributions are split evenly between large cap growth, large cap value, international, and commercial REIT, while my current balance has more of a mix including mid cap growth, mid cap value, and small cap stocks. Half of my employer matching contribution is in company stock, and I exchange out of that stock when I’m in a good position to do so.

And my performance this year through September 30 is a loss of 20.85%.

On the positive side, I’m purchasing my investments at a much lower price now than I was last year at this time.

While some pundits are calling for a Dow as low as 8,000 before we hit bottom, it doesn’t make sense to make reactionary decisions, particularly when the money is invested for the long-term. It does help to review your risk tolerance to determine if you can face downturns and to find a way to strive to separate your emotions from financial decisions. Emotions are there to guide us, to let us know what may be right for us, but when emotions form the basis of financial decisions, investments suffer.

Published or updated October 7, 2008.

Email Email Print Print
About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 9 comments… read them below or add one }

avatar 1 Anonymous

I agree with staying invested but I think you are leaving some money on the table by not having some non-equity allocations. I would particularly look at some inflation protected securities.

Reply to this comment

avatar 2 Anonymous

I am curious to know your thought on these variable annuities that my CPA keeps peddling. He states the insurance company will guarantee 5 -6% return each year no matter what the market does. Sounds suspecious to me.

Reply to this comment

avatar 3 Anonymous

If you have a portfolio, you have to be diversified. Most losses are caused by panic, but if you are smart, you don’t panic. I had a diverse portfolio I was tracking at the time of stock market crash of 9/11. Stocks were dropping and my portfolio was down by 30 percent. I choose not to act because if I sold I would have been at a loss and I just hung in there. Within a year, my portfolio was finally at break even and I had actually had gains by from the dividends. The market continued to grow and my portfolio followed suit.

The lesson was not to panic and to be smart about the companies you are invested in.

Reply to this comment

avatar 4 Anonymous

I’ve found it very difficult to find any sort of advice on 401K tactics in an environment such as this and for my investment time horizon. I have over 30 years of investing before retirement and with all the volatility in the market, i have watched my 401K balance go down hundreds if not thousands of dollars a day. Yes, I know these are “paper” losses but you cannot deny the immediate loss of value to my funds.

So in an effort to stop the blood loss, I transferred my stock fund balances into a money market fund but I continue to make contributions into my stock funds. My thought process was that I would preserve the capital I have but continue to buy into my funds at ever-lowering prices. I keep my eye on the market and am actually employed smack dab in the middle of it so when i see things start to settle down I’ll plow the money in my money market into the stock funds again, which should then be trading at much lower prices, and then ride the appreciation up again.

I know the pundits say don’t try to time the market blah blah but what does everyone think of this plan? It will require a watchful eye on the markets and I’m sure I won’t catch the bottom but I’m preserving capital now and not sitting out of the market forever.

Reply to this comment

avatar 5 Anonymous

I am only 23 and don’t have a whole lot in my 401k yet, so I think I’m going to try to just stay put, but I just feel sick for people who are wanting to retire right now. Last year, my dad thought he would be retiring about now. Instead, he’s still working — he works for himself so he has the option to cut back a little on work, but he wishes he didn’t have to do any. This is not a good time for the Baby Boomers.

Reply to this comment

avatar 6 Anonymous

“This is not a good time for the Baby Boomers.”


It depends. The 45-year old Baby Boomer may well have 20-25 years before he/ she needs ANY of his/ her stocks; and may well have 50 years before he/ she needs ALL of his/ her stocks.

Even the 63-year old Baby Boomer may well not need ALL of the stocks for another 20 or 30 years; and let’s give him/ her credit for having a little sense: OF COURSE he/ she knows as well as you and I do that money you need in the next 3-5 years should be in something safer than the stock market! (Still, chances are the 63-year old Baby Boomer has more reason to worry about the stock market than do their late-Boomer counterparts).

The idea that “if the market has collapsed just before I plan to retire then my retirement is in jeopardy” seems to presuppose that on Retirement Day the only available plan is to cash in EVERYTHING, and that’s that… and, what, buy an annuity with the whole sum? Therefore, naturally, it makes a huge difference if there’s a 20-50% stock market drop just before Retirement Day. But it looks a bit different if you ride out the Bear market by spending down your cash, and hold onto the stocks for rosier times. Granted, there’s no guarantee rosier times will ever come, but I doubt the economic crisis OR the Bear Market is permanent.

Personally, I’m far more worried about the real economy than the stock market itself. The stock market will forever go up and down, and I’m willing to predict that the long-term trend-line will continue to be up.

Reply to this comment

avatar 7 Anonymous

I maxed out my 401k contribution, with a lot of cutting back at home, to buy the most for the least.

Reply to this comment

avatar 8 Anonymous

I totally agree. If retirement is a long way off, and money that we do need soon we keep in stable investments, then we shouldnt be pulling money out, we should be BUYING MORE. Everyone I talk to states they are pulling money out of stocks. I tell them, “Sorry, but its a bit late for that”. If they did that a couple of years ago fine, but not now. Take the hit and buy more. In a few years, your money will be worth much more than those that pulled out after the mayhem.

Reply to this comment

avatar 9 Anonymous

What about leaving what’s there and only putting enough to the get company match? Then take the “extra money” and pay down other things such as mortgages?

Reply to this comment

Leave a Comment

Note: Use your name or a unique handle, not the name of a website or business. No deep links or business URLs are allowed. Spam, including promotional linking to a company website, will be deleted. By submitting your comment you are agreeing to these terms and conditions.