Navigating 401(K) Investments: Strategies For Recession Resilience

A recession is a time of significant economic slowdown, and the value of the investments in your 401(k) will likely decline during a recession. Most equities will eventually recover from a recession-induced pullback. A workplace 401(k) is many people’s first exposure to investing. It can be exciting to see your balance grow as you — and possibly your employer — start contributing. But stock market pull-backs like the recent global sell-off are stark reminders that account balances also go down. It’s natural to worry that a recession will inhibit your ability to retire on time. Generally, the best course of action during a recession is to hold onto your investments and avoid making fear-based decisions.

Hold investments

A recession is a time of significant economic slowdown, and the value of the investments in your 401(k) will likely decline during a recession. Most equities will eventually recover from a recession-induced pullback. A workplace 401(k) is many people’s first exposure to investing. It can be exciting to see your balance grow as you — and possibly your employer — start contributing. But stock market pull-backs like the recent global sell-off are stark reminders that account balances also go down. It’s natural to worry that a recession will inhibit your ability to retire on time. Generally, the best course of action during a recession is to hold onto your investments and avoid making fear-based decisions.

You'll probably want some amount of risk in your portfolio, but how much depends on your needs and on your level of comfort. If you're more risk-averse, lower-risk options like bonds and CDs may make sense. There are also medium-risk investments like mutual funds, real estate and certain types of stocks and bonds. Diversifying the risk levels of your investments can help make large losses less likely so you avoid coming up short in retirement.

A perennial practice in bull and bear markets alike is to keep expense ratios low. During a recession, this practice can help keep more cash in your account. 401(k) fund choices can be overwhelming, with nondescript names and esoteric descriptions. Over time, the opportunity cost from high fees can eat into your expected returns. A dollar spent on fees is a dollar not put to work compounding. For most investors, sticking to simple, low-cost index funds is ideal.

Don't be swayed by fancy investments. Alternative, hedge-fund-like investments have performed admirably year to date. Many of these investments purport to deliver positive expected returns under all market conditions, with a low correlation to stocks and bonds. They can use a variety of strategies, including long/short equities, systematic trend following and complex derivatives and volatility products. They're also expensive, complicated and prone to years of underperformance. For most investors, a balance of stocks, bonds and cash will work just as well with lower fees and better simplicity. Investors should resist falling prey to the "shiny object effect" and stick to basic asset classes.

Take advantage of employer matches on contributions. Revisit your risk tolerance and asset allocation. Don't chase recent performance. Don't try to time the market. Don't panic-sell your bonds. Don't panic-sell your stocks. Keep fees low.

Don't panic-sell

During a recession, the value of the investments in your 401(k) will likely decline. Most equities will eventually recover from a recession-induced pullback. A workplace 401(k) is many people’s first exposure to investing. It can be exciting to see your balance grow as you — and possibly your employer — start contributing. But stock market pull-backs like the recent global sell-off are stark reminders that account balances also go down. It’s natural to worry that a recession will inhibit your ability to retire on time. Generally, the best course of action during a recession is to hold onto your investments and avoid making fear-based decisions.

Revisit risk tolerance

Recession is a time of significant economic slowdown and the value of the investments in your 401(k) will likely decline during a recession. Most equities will eventually recover from a recession-induced pullback.

If you're not sure what to do with your 401(k) during a recession, you can always talk with a financial professional who can help you decide the next best steps for your finances.

You'll probably want some amount of risk in your portfolio, but how much depends on your needs and on your level of comfort. If you're more risk-averse, lower-risk options like bonds and CDs may make sense. There are also medium-risk investments like mutual funds, real estate and certain types of stocks and bonds. Diversifying the risk levels of your investments can help make large losses less likely so you avoid coming up short in retirement.

A perennial practice in bull and bear markets alike is to keep expense ratios low. During a recession, this practice can help keep more cash in your account. 401(k) fund choices can be overwhelming, with nondescript names and esoteric descriptions. For most investors, a balance of stocks, bonds and cash will work just as well with lower fees and better simplicity. Investors should resist falling prey to the "shiny object effect" and stick to basic asset classes.

Revisiting your risk tolerance and asset allocation is important during a recession. This can mean revisiting your asset allocation for the future and allocating more to conservative assets like short-term bonds or money market instruments. Don't be swayed by fancy investments. Alternative, hedge-fund-like investments have performed admirably year to date. Many of these investments purport to deliver positive expected returns under all market conditions, with a low correlation to stocks and bonds.

Keep fees low

High fees can eat into your expected returns. A dollar spent on fees is a dollar not put to work compounding. For most investors, sticking to simple, low-cost index funds is ideal. A perennial practice in bull and bear markets alike is to keep expense ratios low. During a recession, this practice can help keep more cash in your account. 401(k) fund choices can be overwhelming, with nondescript names and esoteric descriptions. Investors should resist falling prey to the "shiny object effect" and stick to basic asset classes. Diversifying the risk levels of your investments can help make large losses less likely so you avoid coming up short in retirement. If you're not sure what to do with your 401(k) during a recession, you can always talk with a financial professional who can help you decide the next best steps for your finances.

Diversify risk levels

Diversifying the risk levels of your investments can help make large losses less likely so you avoid coming up short in retirement. If you're not sure what to do with your 401(k) during a recession, you can always talk with a financial professional who can help you decide the next best steps for your finances.

A workplace 401(k) is many people’s first exposure to investing. It can be exciting to see your balance grow as you — and possibly your employer — start contributing. But stock market pull-backs like the recent global sell-off are stark reminders that account balances also go down. It’s natural to worry that a recession will inhibit your ability to retire on time. Generally, the best course of action during a recession is to hold onto your investments and avoid making fear-based decisions.

If you're more risk-averse, lower-risk options like bonds and CDs may make sense. There are also medium-risk investments like mutual funds, real estate and certain types of stocks and bonds. A recession is a time of significant economic slowdown. The value of the investments in your 401(k) will likely decline during a recession. Most equities will eventually recover from a recession-induced pullback.

If you're not sure what to do with your 401(k) during a recession, you can always talk with a financial professional who can help you decide the next best steps for your finances. Over time, the opportunity cost from high fees can eat into your expected returns. A dollar spent on fees is a dollar not put to work compounding. For most investors, sticking to simple, low-cost index funds is ideal. Next:8 rules for managing your 401(k) in a recession: ... Don't chase recent performance. Don't try to time the market. Don't panic-sell your bonds. Don't panic-sell your stocks. Take advantage of employer matches on contributions. Revisit your risk tolerance and asset allocation. Don't be swayed by fancy investments. Keep fees low.

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