Timing Markets With 401(k) Stocks? Bad Idea

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Timing Markets With 401(k) Stocks? Bad Idea

For years, Jack Bogle, the famed investor and inventor of Vanguard, has issued the same advice: diversify your 401(k) assets, purchase low-cost index funds, and don’t look at your monthly statements until the end of the year. But it’s difficult to follow this counsel in good times, and much more difficult when the seas are rough.

In case you missed it, investors have been nervous about inflation in recent weeks. The markets have not collapsed. However, the winds of correction are all about us. We haven’t had such worries in a long time, and younger investors may be experiencing them for the first time. But, if you’re considering selling stocks and ETFs in your 401(k) accounts to get out before things go ugly, think again.

This is a cardinal offense, according to any decent financial counselor or planner. Recent history—the past 60 years—will demonstrate this. Market downturns occur, but you must be prepared to tolerate them if you want to succeed in the long run. According to Alight Solutions, which records 401(k) activity, 401(k) investors were unusually active traders in 2020. Net transfers as a percentage of balance for the year were 3.5%, the highest level since 2008.

“Unfortunately, we witnessed many investors repeat the terrible tendency of selling low and purchasing high that has been seen frequently throughout the Alight Solutions 401(k) Index’s more than 20-year history,” said Rob Austin, head of research at Alight Solutions. “The busiest trading days were when stocks were falling, and the transactions disproportionately shifted from equities to fixed income” (…)Investors did not return to stocks until the end of the year, when the market was making new highs.”

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Key Takeaways

  • Market downturns occur, but you must be prepared to tolerate them if you want to succeed in the long run.
  • It’s OK to rebalance your 401(k) on occasion, but if you attempt to timing the market with it, you may end up digging yourself a financial hole out of which you’ll never be able to rise.
  • The ideal strategy is to diversify your 401(k) assets, invest in low-cost index funds, and ignore your monthly statements until the end of the year.

What to Consider for Your 401(k)

Of course, the simplest strategy to avoid trading too often is to begin with a well-diversified portfolio. As previously said, mutual funds and ETFs are a straightforward method to do this.

Furthermore, the funds you choose should be as near to your risk tolerance as feasible. When your investments are in accordance with both your risk and return goals, it is much simpler to be patient in tumultuous markets.

Here are some of the primary types of funds to consider:

Funds that are conservative. A conservative fund often pursues low-volatility assets such as high-quality bonds, major blue-chip companies, and other low-risk investments. In conservative funds, your money increases slowly and consistently, but it grows securely.

Funds should be valued. A value fund is often low-to-moderate risk, investing mostly in steady firms that are undervalued. Value funds also search for firms that consistently pay out good dividends.

Funds that are well-balanced. A balanced fund often invests in a variety of asset types, including a mix of low and medium-risk equities and bonds. Balanced funds seek income as well as capital appreciation.

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Funds for aggressive expansion. Anaggressive growth funds strive to maximize upside while putting capital appreciation first. As a result, aggressive growth funds often exhibit increased volatility and risk. In reality, the fund may fluctuate dramatically between large profits and large losses over time.

Time in the Market, Not Market Timing

We are neither intelligent or foolish enough to foresee what the markets will do in the near term.

Nobody is, and don’t trust anybody who says they are. However, keep in mind that your 401(k) is not a video game or “fun money.” It’s your retirement vehicle, as well as the light at the end of the tunnel.

Get a brokerage account or learn to trade on our stock simulator if you want to dabble with stocks or attempt to time the market.

Set up your 401(k) with an asset allocation that is appropriate for your risk tolerance and long-term objectives. It’s OK to re-balance it on occasion, but if you attempt to use it to time the market, you can end up digging yourself a financial hole out of which you’ll never be able to rise.

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