I’ve purposely not looked at my 401K account this week. I did check it a month ago to see if I needed to rebalance. At that time, I’d lost 2% less than the broader market and was well-diversified, so I didn’t change anything. I still don’t plan to. There are still a few things you should do about your investments during this crisis, however.

Don’t Panic
I know it’s hard, but panicking won’t do you any good. There’s absolutely nothing you can do to fix this and there’s no stock you can buy that is guaranteed to reverse your losses right away or avoid additional losses.

Invest in Index Funds
If you hold individual stocks in your retirement accounts, it might be time to move that money into a diverse range of index funds. It’s hard to predict when or how much a specific stock will recover. Although you do risk missing out on a huge recovery if you shift the money to an index fund, you also avoid the risk of losing even more money on a stock that fails to recover.

Personally, I would choose at least the following index funds:

  • S&P 500 Index Fund
  • Small Cap Index Fund
  • International Index Fund (Europe and Asia)
  • Value Fund

You could also consider an Emerging Markets Fund, but it’s a bigger risk. If you want to invest in a couple of sector-specific funds, energy and health will most likely be winners in the coming years. Real estate might not be a great sector to get into for a while, but it’s a choice only you can make.

Increase Retirement Contributions
The old rule says that you should buy low and sell high. If you’ve got a long time horizon (say 20-30 years), then now is the time to increase your contributions as much as you can comfortably afford. If you have a 401K match, increase contributions up to the limit on the match, then deposit the rest of your contributions into a Roth IRA (if eligible). If you don’t have a match, contribute the max to a Roth IRA instead.

Don’t Try to Time the Market
Don’t try to buy a fund right now to lock in a specific base price, because you may not get today’s price. You could get tomorrow’s price and no one knows what that will be. Instead, continue the traditional method of dollar-cost-averaging. Invest in your retirement plan throughout the course of the year, rather than all at once. That will be easier on your budget, too.

Don’t Get Fancy
Your retirement account is not the place to try shorting stocks or buy options. Keep it simple when your future is on the line.

Look for Losses in Taxable Accounts
If you had taxable gains earlier in the year, now is a great time to harvest some losses, especially if you own financial stocks that appear unlikely to recover in the near term. You can always re-buy them in 31 days if you think they’re a good buy in the long term.

Doing all of the above won’t stop that sick feeling you have in your stomach. The only cure for that is putting it right out of your mind. Don’t look at the statements, don’t think about your losses. Just move forward. The market will recover eventually and it will take your retirement account up with it if you stay the course.

Comments

3 Responses to “401K and IRA Strategies During the Financial Crisis”

  1. Girls Just Wanna Have Funds-Personal Finance For Women on October 6th, 2008 5:09 am

    [...] from Sound Money Matters presents 401K and IRA Strategies During the Financial Crisis, and says, “Recent reports say that people are draining their accounts. BAD [...]

  2. ginger b on October 15th, 2008 10:55 pm

    what good does it do to ride out the storm if you lose everything? Our 401k has had enough loss in the past 3 months that if it happens a couple more times the balance will be zero….what then?

  3. Aryn on October 16th, 2008 10:02 am

    Ginger, it’s a valid concern, but I did some research for piece on the depression. Read this blog to see how investors fared after the depression:

    http://newsblogs.chicagotribune.com/marksjarvis_on_money/2008/10/what-the-depres.html

    In general, people with a time horizon longer than ten years made back all of their gains and then some within thirteen years. For non-depression bear markets, the recovery takes only 2 1/2 years.

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