What to do with your 401k during a stock market crash

You know the story of “The Tortoise and the Hare”? It turned out slow and steady won the race.

That applies to investing, too.

On Monday, the Dow Jones Industrial Average saw its worst drop since 2008 in response to news of COVID-19 and the oil price war, and the roller coaster ride the stock market has taken in the last two weeks has left plenty of investors feeling a bit queasy.

If you have a 401(k) or IRA, and you checked out its current value on Monday evening, you may have felt your own steep drop in the pit of your stomach.

Here’s what you need to know if you’re worried about your 401(k) amid the latest turmoil in the stock market.

RELATED: Take a look at the biggest things you shouldn't hold off until retirement:

How Your Retirement Investments Work

To understand why you shouldn’t panic too much about your retirement accounts, you need to know how they work.

A 401(k) is an employer-sponsored investment plan while Individual Retirement Accounts — either traditional or Roth IRA — are typically set up by the individual to invest money toward retirement.

If it’s a 401(k) or traditional IRA, you get the tax benefit up front and pay when you withdraw; with a Roth IRA, the withdrawals are tax-free. Either way, by adding money on a regular basis, these accounts let you grow your retirement nest egg that you can live on in your retirement.

In the beginning, you’ll have more time to take risks on investments — like stocks — and when you get closer to retirement age, you’ll shift investments to less-risky categories like bonds and cash that don’t lose their value during a market slump.

So even if there’s a dip in the stock market, you’ll have time to recover if you’re younger and you’ll be better protected from fluctuations as you near retirement.

FROM THE RETIREMENT FORUM

See more in Retirement or ask a money question

What to Do With Your 401(k) During a Slump

Watching your 401(k) balance take a tumble isn’t anyone’s idea of fun. We get it.

But this is not the time to panic, according to Certified Financial Planner Holly Donaldson of St. Petersburg, Florida.

That’s because the cash component of your account, as well as the contributions you should absolutely continue to make, can be used to buy up more funds at rock-bottom prices.

So selling is the last thing you want to do because you’d be locking in your losses.

This portrait is of Holly Donaldson, a certified financial planner. The portrait of her is outside against a green bush.
Certified Financial Planner Holly Donaldson noted that it typically takes the stock market one to two years to correct itself, so a single day — or even a few weeks — of volatility should not change your long-term strategy. Chris Zuppa/The Penny Hoarder

In fact, Donaldson suggests ignoring your newsfeed if it puts you in a panic about your retirement accounts.

“What I advise is you use the calendar and not the news,” said Donaldson, who suggested checking in with your portfolio on a quarterly basis rather than a daily one.

Pro Tip

Don’t withdraw your money from an IRA or 401(k) — the penalties for early withdrawal are substantial.

She noted that it typically takes the stock market one to two years to correct itself, so a single day — or even a few weeks — of volatility should not change your long-term strategy.

Avoiding the stress of hourly updates on your investments is key to not only a balanced financial portfolio but your mental health, too.

“If a 27-year-old wants to increase their chances of suffering chronic anxiety, then yeah, sure, look at your 401(k) every day,” she said.

And even if you’re closer to retirement, Donaldson recommended talking to an hourly financial planner or speaking to your employer’s 401(k) representative to ensure your portfolio has the right mix of stocks, bonds and cash.

Slow and steady. Wins it every time.

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

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