Recession Watch: You can't 'recession proof' your 401(k)

I hate to be the bearer of bad news, but there is no Santa Claus, Tooth Fairy, or Easter Bunny, and it's impossible to "recession-proof" your 401(k), because no sector is immune from an economic slowdown. You can, however, take some reasonable precautions to limit the damage.

For one thing, stay the course. Unless you are in dire financial straits, don't cut back or quit contributing to your retirement fund. The stock market is your friend over the long term, though over the past few months it hasn't been much of one. Make sure that you are well-diversified and don't be afraid to get out of funds that aren't performing well and seem to have little chance of recovery. Furthermore, avoid the temptation of doing anything rash like liquidating your 401(k) because of worries about the market, since the tax consequences are severe.

Figuring out why a fund is performing poorly isn't difficult given the huge amount of financial information on the web. Remember, historically some sectors in the stock market such as health care and consumer staples such as Coca-Cola do well when the economy slumps. IBM and other companies with large overseas business also are being helped by the weak dollar. There are losers, such as financial and industrial stocks. Even tech companies, including Google, are in Wall Street's dog house. No company, though, will escape the recession unscathed, and anyone who thinks otherwise is kidding themselves

The stock market's wild gyrations over the past few months have frightened even hardened Wall Street investors, so it's understandable that individual investors are petrified. But the difference between pros and amateurs in the investing game is discipline. They look at their portfolios the way that a boss looks at their employees, and they get rid of poor performers. Under no circumstances will they fall in love with stocks or out of love with them. The same goes for funds.You might want to consider reallocating how you invest your money in your 401(k), bulking up on bond funds or those focused on high-dividend stocks like utilities.

Here are few other suggestions:
  • Remember, there is no law that says you have to do anything, even though the CNBC pundit class is screaming every day that investors must make a move immediately. In fact, some investors might be better off leaving their portfolio alone, particularly if they are in low-cost mutual funds or exchange-traded funds with a solid track record. Check with a financial adviser if you aren't sure.
  • Buy and hold doesn't mean "buy and forget." While it's a good to think long term, you have to know or trust someone who knows what's going on with your investments. Don't be passive.
  • The market won't be down forever. Think of Wall Street like a pendulum that swings between love and hate. Yesterday's heroes are today's goats and vice versa. For instance, tech stocks were on fire last year and are in the dog house this year. Financial stocks have gotten pounded as well. Remember, though, that the name of the game is to buy low and sell high, even if anyone buying these stocks now is in for a bumpy ride over the next few months.

This post is part of a series offering consumers advice on what to do during a recession.

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