How the stock market is impacting your 401K
For the past few weeks, we've been watching how volatile the stock market has been. That has left many people wondering, what does that mean for my 401k? Should I pull my money out?
Richard Jay, first vice president-investment officer with Wells Fargo says, not so fast.
“The last thing you want to do is pull everything out,” he said.
For 26 years, Jay has been watching the stock market and its impact on retirement plans. He says what you do all depends on your asset allocation.
“If you're 90% allocated to the stock market, then you're 90% of the market,” he said. “If you're more conservative and have 20% in the market, then obviously you're less tied to the market.”
For even the most math deficient, that makes sense. The problem, many average investors don't know their allocation. Jay says, it’s time to start paying attention.
If you're just blindly contributing to your 401k, the good news Jay says, is you may be in a better position than you think..
“Chances are...you'll go into what we call an age based portfolio,” he said. “The younger you are, the more stocks you'll have. And as you get closer and closer to that retirement age, it automatically becomes more conservative.”
So in the current market younger investors have likely lost more than older investors. But that shouldn’t send millennials into a panic.
“You're young,” Jay said. “You have plenty of time. We will live through this. So, two or three years from now, you can think about this, yeah, I lived through that and we're just fine now.”
While Jay concedes past performance is no indicator of future results, he said history has shown things can recover quickly.
“We've seen anywhere from four months to 12 months for markets to recover,” he said. “You know, typically what we've seen in the past is that the steeper the decline the steeper the recovery.”
The one thing Jay says you do want to look at is where your money is going.
“The more diversified you are in times of economic stress like we're in right now, the better you're going to weather it. It's like the old adage, don't put all your eggs in one basket.”
That means splitting your 401k contributions between stocks and bonds- and bonds right now are doing well. If you're unsure of how much goes where, consider this basic rule.
“Whatever your age is, that's the percentage that you should be in bonds.” Jay said. “So if you're 30 years old, you should be 30% bonds, 70% stock market.”
Your plan website will tell you how much of your money is going where. Jay says it's wise to look at your contributions right now and rebalance- or move how much you contribute where. But the most important lesson is don’t panic. Now just might actually be the right time to contribute even more to your retirement.
“Remember 401k is long term,” Jay said. “Take advantage right now with these markets being down. The old adage of buy low, sell high is proven right now. We're buying pretty low right now so take advantage of that. If you can afford to put a little bit more in, I would do so.
The last advice, don’t let fear take over. You should be more conservative the closer you get to retirement, but if you’re young, take a breath and wait. If you are concerned, talk to a financial advisor, and if you don't have one, most retirement plans have an 800 number you can call.