If your 401k is invested in the stock market, you saw a loss in 2008. You may have sat by helplessly as your retirement savings dwindled. Your first instinct and it may still be a consideration is to get out now. You can start to pull out of your stock funds and invest in safer bets, like bonds and money markets, but is it the right idea? It all depends, but on what?
Your diversification. Most individuals mistakenly believe that 401k diversification means investing in a collection of stocks and bonds. Yes, it does, but there is more. With stocks, you want to examine the industry. Never invest in just one, like the auto industry. Diversify your stocks so that if one industry suffers, you still have the others to fall back on.
When diversifying, consider consumer spending habits. The entire stock market took a dive in 2008 due to the poor economy. Consumers limited their spending habits. When they did spend, they opted for discount retailers or affordable restaurants. Right now, the auto industry is suffering, as people are buying less cars. With that said, people still need to eat. For that reason, grocery stores, affordable restaurants, and affordable department stores are still holding steady.
If you are invested in stock that may not recover as quickly as the rest, like with the auto industry, consider pulling out of those stocks, but don’t remove all your stock investments. Switch to a money market account or buy different stock. Remember though that the economy will start to improve, it will just take time. In fact, that leads the next factor.
Your age. How old are you and when do you want to retire? If soon, you may be unable to wait until the economy improves and stock prices rise. In that case, take the stock that you lost the smallest amount of money on. Protect yourself from losing more. Even if you intend to retire in 3 years, give some stock a chance to improve. Do this with your biggest losers.
On the other hand, if you are young and don’t intend to retire for 15 years or more, you can and should wait it out. The stock market and the economy will improve. Financial experts keep emphasizing this point. You are able to withstand the ups and downs. If you lost money, don’t pull out now. The only exception would be companies or industries in which you don’t expect to recover right away. Do you hear rumblings that a retail store you invest in may close? It may be nothing more than a rumor, but consider your loss if the company does collapse.
The amount of money you have lost. As previously stated, many 401k account holders lost money in 2008 due to the poor economy and stock market. If you are nearing retirement, you may have lost $150,000 or more. This is cause for concern. Since the market is expected to turn around soon and consumer spending will improve, try to wait it out. If you cannot, start making the switch. With that said, focus on still steady stocks. Even if you only have two years until retirement, give the bigger losers a chance to improve. In this aspect, you will recuperate a small percentage of your loss, but it is better than nothing.
In short, it is a good idea to pull away from 401k stocks in some cases. In most instances, it is best to weather the storm. If you are unsure what to do, speak with a financial advisor.