Why is My 401(k) Account Losing So Much Money?
Seeing your retirement savings decrease can be daunting, but don’t panic: investments should be treated as long-term investments that tend to rebound after every downturn in the stock market.
Avoiding 24-hour news cycles which often contain fear-mongering and speculation can also help.
The Great Recession was a difficult period for Americans of all generations, particularly baby boomers nearing retirement. This decade-long economic slowdown brought unemployment spikes, home value declines, lower stock prices and higher interest rates that caused retirees to experience significant savings losses.
Assuming you’re still years from retirement, your 401(k) account should still have time to recover from its recent market dip. Recessions are normal events and stocks tend to return quickly after such short-term events have passed.
As evidenced by history, the stock market has always recovered from recessions. So if your 401(k) balance is making you nervous, don’t panic; remember that steady growth will help reach your long-term financial goals more quickly and safely. Furthermore, diversify your portfolio to reduce exposure to volatile assets by investing more evenly between stocks and bonds or altering your allocation to include fewer stocks than before.
Though it can be discouraging to witness your retirement account decline in value, it’s important to remember that market fluctuations are temporary. Over time, any effects from market fluctuations should even out, particularly if you invest a significant percentage of your income into stocks and other forms of assets.
As someone close to retirement, market downturns can be particularly troubling. Retirees will need to sell investments at discounted prices in order to maintain their overall portfolios; selling investments during down markets also prevents you from participating in potential recoveries in the future.
In certain instances, you may be able to convert your retirement account to a short-term fixed annuity that can provide protection from stock market volatility. If you’re saving for retirement, taking steps like this as early as possible could ensure your funds continue growing while remaining protected in case the market experiences any major fluctuations or downturns.
Fees charged against your retirement account may seem minor at first glance; however, they can quickly add up over time. Unfortunately, you cannot avoid most of these charges; these cover investment management and services such as custodial, legal, transfer agent and recordkeeping that are essential to its operation.
One of the largest expenses is “12b-1 fees”, paid out of fund assets to compensate brokers for selling funds’ shares. As your retirement account balance increases, these expenses become more burdensome, ultimately diminishing returns needlessly.
Although fees may seem mysterious, you can learn about them. Most plans will clearly disclose them – whether that means in a prospectus given to new investors or on your 401(k) statement. Look for “Total Asset-Based Fees,” “Total Operating Expenses as a Percent” or “Expense Ratios.” However, while fees should certainly factor into retirement savings decisions, fees shouldn’t be the sole deciding factor.
Most financial advisers will tell you that diversification is the key to protecting your portfolio against risk and volatility, with diversifying holdings as the basic principle embodied in the saying, “Don’t put all your eggs in one basket.” Diversifying means owning multiple investments so if one asset class drops in value while others rise instead. Furthermore, diversifying helps smooth returns so you won’t experience sudden spikes and valleys with one stock that takes off unexpectedly.
Diversifying your portfolio is easily achievable when investing in mutual funds or exchange-traded funds, which often hold various assets across each asset class, like stocks and bonds. Diversification becomes particularly essential if you’re saving for retirement; you will need them to last through decades of volatility in interest rates; even short-term investments may experience sudden price spikes due to fluctuations in value as interest rates shift upward or downward; you can reduce risk by diversifying by company industry, size or location.
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