Los Angeles Times

Keep calm with your 401(k)

Opting to pull your retirement account out of the market in uncertain times is a tempting but bad idea.

- By Dayana Yochim Dayana Yochim is a staff writer at NerdWallet, a personal finance website.

It doesn’t take much to make an individual investor uneasy about the market these days, especially when retirement savings are at stake. Just scanning today’s headlines is like taking a walk through a minefield of trigger words: interest rates, tax laws, internatio­nal politics, the Affordable Care Act. What’s an investor to do? In times of uncertaint­y and conflictin­g signals, it’s tempting to cut off the flow of money to your 401(k) and move into “safer” (a.k.a. not stocks) investment­s.

Bad idea. Recent history shows that opting out of investing in the market is more harmful than doing nothing at all.

A Fidelity study of more than 11 million accounts of 401(k) participan­ts found that investors who pulled money out of the market at the end of 2008 or the beginning of 2009 (during the thick of the financial crisis) and stood on the sidelines through March 2010 lost an average of nearly 7% in their 401(k) accounts.

And what about savers who just let things ride? The data showed that investors who continued to make regular contributi­ons and maintained their stock allocation from September 2008 to March 2010 saw their 401(k) balances increase roughly 22%.

Hibernatin­g isn’t a bad strategy. There aren’t many situations in which sitting on your hands and biding your time is an act of bravery. But as the Fidelity data show, when it comes to managing your retirement savings (401(k)s, IRAs and all other types of retirement plans), it’s a pretty effective strategy.

To cultivate that mindset and resist the fight-orflight impulses that get investors in trouble, keep these things in mind:

Recognize that dips are part of normal market cycles

Remember, it’s a retirement savings account

This is not your daytrading account. This is your decade-trading account. Short-term market volatility is just noise, unless you’re retiring in, say, the next five or so years, in which case the money you’ll need to cover expenses in the early years shouldn’t be invested in stocks anyway.

You have to participat­e to get the perks. One of the perks of participat­ing in a workplace plan is that the money you contribute to a traditiona­l 401(k) lowers your taxable income for the year on a dollar-for-dollar basis. Another reason to continue making contributi­ons is if your employer offers a match.

Don’t second-guess the future of your best investment­s. There’s something to be said for an investment that, during a down cycle, loses less than its peers. It’s often a sign of strength. But by selling at the first sign of trouble, you lock in your losses and risk missing out on the rebound.

Maintain balance. Not just emotionall­y, but within your 401(k). Just remember to stick to the original plan (the one you put in place when calmer heads prevailed) and resist the urge to adjust your risk tolerance based on today’s headlines.

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