Time markets with 401 (k) stocks? Bad idea


  • Market crashes do happen, but you have to be able to withstand them if you want to win the game in the long run.
  • It’s okay to rebalance your 401 (k) occasionally, but if you try to use it to time the market, you may be digging yourself a financial hole that you will never be able to get out of.
  • The best approach is to diversify the holdings in your 401 (k), buy inexpensive index funds, and not look at your monthly statements until the end of the year.

Jack Bogle, the legendary investor and founder of Vanguard, has given the same advice over and over for years: Diversify holdings in your 401 (k), buy inexpensive index funds, and don’t look at your monthly statements until the end of the year. . But this advice is difficult to follow in good times, and even more so when the waters are rough.

In case you missed it, inflation fears have made investors a bit nervous in recent weeks.

The markets have not crashed. But the winds of correction are blowing around us. We haven’t felt those concerns in a while, and younger investors may feel them for the first time.

But if you’re thinking of selling stocks and ETFs in your 401 (k) accounts, trying to get out of trouble before things get worse, think again.

Any reasonable financial planner or adviser will tell you that this is a cardinal sin. Recent history, the last 60 years, will show it. Market crashes do happen, but you have to be able to withstand them if you want to win the game in the long run.

Data of Alight Solutions, which tracks 401 (k) activity, shows that 401 (k) investors were particularly busy merchants in 2020. Net transfers for the year as a percentage of balance were 3.5% for the year, the highest level since 2008.

“Unfortunately, we saw many investors repeating the unfortunate trend of selling low and buying high that has been repeatedly demonstrated throughout the more than 20-year history of the Alight Solutions 401 (k) index,” said Rob Austin, Head of Research. by Alight. Solutions. “The busiest trading days were when stocks fell and trading overwhelmingly shifted from equities to fixed income.”

“It wasn’t until the end of the year, when the market was setting new all-time highs, that investors went back to trading in stocks.”

What to consider for your 401 (k)

Of course, the easiest way to avoid trading too often is to be well diversified in the first place. As we mentioned earlier, mutual funds and ETFs offer a simple way to do this.

Also, the specific funds you choose should match your own risk tolerance as closely as possible. It’s much easier to be patient in volatile markets when your investments are aligned with your risk and return objectives.

Here are some of the main categories of funds to choose from:

Conservative funds. A conservative fund generally looks for investments with low volatility, such as high-quality bonds, large first-class stocks, and other low-risk investments. Your wealth generally grows slowly and predictably in conservative funds, but it grows safely.

Value funds. A value fund typically presents low to moderate risk and invests primarily in stable companies that are undervalued. Value funds also tend to look to companies that consistently pay out healthy dividends.

Balanced funds. A balanced fund generally invests in all asset classes, including a mix of low- and medium-risk stocks and bonds. Balanced funds seek both income and capital appreciation.

Aggressive growth funds. An aggressive growth fund seeks to maximize potential and prioritize capital appreciation above all else. For this reason, aggressive growth funds tend to show higher volatility and risk. In fact, over time, the fund can swing enormously from big gains to big losses.

Time to market, not time to market

We are not smart or dumb enough to predict what the markets will do in the short term.

No one is, and don’t believe anyone who promises otherwise. But remember, your 401 (k) is not a video game or “fun money.” It is your retirement vehicle and your light at the end of the tunnel.

If you want to play stocks or try to time the market, get a brokerage account or learn how to trade in our stock simulator.

Set up your 401 (k) with an asset allocation that’s right for you based on your risk appetite and long-term goals. It’s okay to rebalance it from time to time, but if you try to use it to time the market, you may be digging a financial hole that you will never be able to get out of.

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Mark Holland

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