How to protect your 401(k) in a bear market


After hitting in the first half of 2022, then recovering some losing ground, stocks are once again in the red for the year, with the S&P 500 down more than 20% year to date. The aggregate S&P US bond index, on the other hand, fell by around 14%.

And investors can see much more excitement next year.

“Markets are likely to be volatile — both up and down — over the next six to 12 months as the Federal Reserve continues to raise interest rates in the fight against inflation,” said Chris Zaccarelli, chief investment officer of the Independent Advisor Alliance. “If you’re going to buy stocks at this point, you’re going to have to be patient and hold those positions for a longer period of time than many people are used to — two or three years in some cases.”

While it may be a bumpy road ahead, here are some ways to mitigate the long-term damage to your nest egg.

Forget market timing

Bearish markets can be a bear on your psyche. You may want to sell your equity investments and move the proceeds into cash or a money market fund.

You will tell yourself that you will move the money into stocks when things improve. But doing so will lock in your losses.

If you’re a long-term investor — which includes those in their 60s and early 70s who may be in retirement for 20 years or more — don’t expect to ride out the current downtrend.

When it comes to investing success, “It’s not about timing the market. It’s about timing the market,” said Taylor Wilson, a certified financial planner with Greenstone Wealth Management in Forest City, Iowa. “In bull markets people tend to think the good times will never end and in bear markets they think things will never be good again. Focusing on the things you can control and implementing proven strategies will pay off over time.”

Say you invested $10,000 in the S&P 500 at the beginning of 1981. That money would grow to nearly $1.1 billion by March 31, 2021, according to Fidelity Management & Research. But if you missed the five best trading days in those 40 years, it would come to roughly $676,000. And if you had sat for the best 30 days, your $10,000 would have only grown to $177,000.

Rethink your contributions

If you convince yourself not to sell at a loss, you may be tempted to hold off on your regular contributions to your retirement savings plan for a while, thinking you’re throwing good money after bad.

What rising interest rates mean for you

“This is difficult for many people because the knee-jerk reaction is to stop contributing until the market recovers,” said Sefa Mawuli, CFP at Pavlov Financial Planning in Arlington, Virginia.

“But the key to 401(k) success is consistent, ongoing contributions. Continuing to contribute in down markets allows investors to buy assets at cheaper prices, which can help your account recover more quickly after a market downturn.”

If you’re financially able to make the switch, Wilson recommends increasing your contributions if you’re not already within the limit. In addition to the value of buying more at a discount, taking positive steps can offset the anxiety of seeing your nest egg (temporarily) shrink.

Reevaluate your assignment

Life happens. Plans change. And so your time horizon for retirement. So check that your current allocation to stocks and bonds matches your risk tolerance and your ideal retirement date.

Do this even if you’re in a target-date fund, Wilson said. Target date funds are aimed at people who retire around a certain year, such as 2035 or 2040. The fund’s allocation will become more conservative as that target date approaches. But if you’re someone who started saving late and needs to take on more risk to meet your retirement goals, he noted, your current target date fund may not offer that.

If you really can’t stand it, increase your ‘comfort money’

Mark Struthers, a CFP at Sona Wealth Advisors in Minneapolis, works with 401(k) participants to provide financial wellness counseling at organizations that hire his firm.

So he’s heard from people across the spectrum expressing concern that they “can’t afford to lose” what they have. Many educated investors also wanted out during the downturn at the start of the pandemic, he said.

Struthers will advise them not to panic and remember that downturns are the price investors pay for the high returns they get in bull markets. But he knows that fear can get the better of people. “You can’t say ‘don’t sell’, because you’ll lose some people and they’ll be worse off.”

And it’s been particularly disappointing for investors to see that bonds, which are supposed to reduce the overall risk of their portfolios, have also declined. “People lose faith” said Struthers.

So instead of contradicting their fears, he’ll try to do something to assuage their short-term worries, but do the least long-term damage to the nest egg.

How much do I need to save for emergencies?

For example, someone may be afraid to take enough risk in their 401(k) investments, especially in a falling market, because they fear losing more and having less financial resources if they ever get laid off.

So it reminds them of rainy day assets like an emergency fund and disability insurance. It can then suggest that they continue to take enough risk to generate the growth they need in their 401(k) for retirement, but redirect a portion of the new contributions to a cash-equivalent or low-risk investment. Or he might suggest putting the money into a Roth IRA, because those contributions can be rolled in tax-free or penalty-free if needed. But it’s also about keeping the money in a retirement account in case the person doesn’t need it for an emergency.

“Knowing they have that comfort money there helps them get through the panic,” Struthers said.