It can be scary to watch your 401(k) balance decline during a bear market. Most millennials still have 20 or more years until they reach retirement age, which is plenty of time for balances to recover. Nevertheless, the decisions millennials make now are likely to have a long-term impact on their retirement finances.
The important thing for millennials and other age groups is to avoid the panic that will often lead to bad financial decisions. Here’s how millennials should manage a 401(k) during a stock market downturn:
- Don’t panic.
- Stay invested.
- Get a financial planner.
- Continue regular contributions.
- Stop looking at your statements.
Avoid making significant changes to your retirement savings and investment plan when you are feeling emotional or worried. Instead, work on creating an investment strategy that you can stick to regardless of short-term stock market performance. “When you think about it, millennials have the best gift, which is time. They have time to continue with their plan, and hopefully they have a plan,” says Shelly-Ann Eweka, a senior director of financial planning strategy at TIAA. “If they don’t, I recommend that they create a financial plan. They can work with an advisor in person or there’s plenty of software and tools that they may be able to have access to, and I would tell them to stay focused on their long-term goals.”
Pulling your money out of the stock market during a bear market locks in your losses. “The thing that’s working in favor of millennials is their age,” says Eric Satz, founder and CEO of Alto. “The thing I would encourage them to do, besides talking to their financial advisor, is don’t exit the market.”
A stock market decline can actually be a buying opportunity for younger investors to put money into the market and continue to contribute to an IRA or 401(k). “Every lesson is to buy low and sell high, and we as human beings have this unique capability to do just the opposite of that because we get all excited when prices are going up and we panic when prices are going down,” Satz says.
Talk to a Financial Advisor
Look for a financial advisor who is able to understand and address your specific needs, and who will be with you as your family grows. A financial planner can help provide a financial roadmap through marriage, home buying, college tuition and eventually retirement. “The benefit of talking to a professional is that they help you with the emotions that you’re dealing with right now,” Eweka says. “They help us take our emotions out of our decision making when it comes to finances.”
Continue Regular Contributions
Millennials can take advantage of dollar-cost averaging, in which you continue to contribute the same amount when markets are up or down, which reduces the impact of volatility. “At this time when the market is dropping and you’re investing, you are purchasing at a lower value,” Eweka says. “Let’s say you’re putting $300 a month into your account. You’re buying more units because the unit cost price is lower. So, when the market does start to rebound, you have more units now, and you’re going to see the value of your investments grow even quicker because of that.”
If you can, try to increase your monthly contributions when the stock market is down. “Every two weeks or every month, if you have the ability to put money aside, you should absolutely be putting it aside for investment in your retirement,” Satz says.
Don’t Look at Every Statement
If it reduces stress, you don’t have to open every monthly or quarterly statement. While it’s a good idea to monitor your investments, you don’t need to log in to check your 401(k) account on a day when the stock market performed particularly poorly. “I would never tell anybody to bury their head in the sand and not know what’s going on, but really if your time horizon is one of decades, what difference does it make looking today?” Sentence says.