You likely hear a lot of conflicting advice
about how to manage your
, especially when it comes to 401(k)s held
through an employer. How often should you adjust allocations? Should you try to
micromanage it with the limited options you’re given? Should you update it
annually, biannually or monthly?
One commonality you’ll find among most sources is an emphasis
on the role time plays in your 401(k) strategy. How much longer do you have
until your retirement? The old adage that you continue reducing risk as you get
closer to retirement is one of those entry-level 401(k) best practices for
which there’s generally unanimous support.
This risk reduction can be safely examined through a lens of
decades and years. If you start taking advantage of matching funds in your late
teens or early 20s you will likely have 50 or more years of 401(k) investments
to look forward to, so investing aggressively when you’re young gives you a
chance to experience better growth on a smaller amount and take on more risk
during a period of your life when you’re not exactly relying on your 401(k) for
an immediate income stream. Even if a bear market were to hit a young investor,
their 401(k) still has several decades in which to recover.
That being said, if there’s a bear market on the horizon, and
at any given time you can hear opposing viewpoints on the likelihood of that,
then you may want to consider adjusting your allocations to more defensive
positions that are less exposed to the negative repercussions of market
pullbacks. Whether or not you do this is dependent on your outlook on the
market and whether you think the likelihood of a bear market is becoming an
When it comes to equities, or stocks, there’s
always inherent risk. The market can fluctuate, scandals within a company can
arise and recalls and lawsuits happen, just to name a few potential scenarios
that can result in the rapid devaluation of a particular company’s stock.
Bonds, on the other hand, are almost universally viewed as safer for a variety
- Bonds are, in essence, a guarantee that the lender will
receive face value once the bond has matured.
- Typical bonds pay a fixed interest which are guaranteed by
the issuer and are part of the bond’s terms. This is different than the dividend
payments some stock holders receive, which are entirely dependent on the
issuing company’s business and management style.
- From a long-term standpoint the bond market is typically more
stable and less volatile than stock markets.
That being said, with little risk comes little reward.
Although bonds can be traded and pay out a minimal interest to holders, they
don’t have the growth or dividend potential equal to equities.
You generally only have so many options when it
comes to your 401(k)’s allocations. Keep in mind that small-cap companies have
more growth potential, in most cases, than large-cap companies whose big growth
days are behind them. But with large-cap companies generally comes more stability
and less risk.
International stocks are another potential growth option
given the global economic climate, but if there are big pullbacks in Asia,
Europe and elsewhere it may be a good idea to divest out of international and
move more toward domestic bonds.
If you have the option to invest in index funds you can also
consider index funds that are designed to be bear proof. There are certain
industries that maintain value and in some cases even grow during a bear market
or recession. People, regardless of the economy (or in some cases maybe because
of it), will continue drinking alcohol or smoking. They will likewise continue
to need health care and other standard services such as electricity, waste
disposal, internet and household goods such as toilet paper or toothpaste.
If you don’t want to get entirely out of equities but fear a
bear market is inevitable, you may want to research various index funds that
are designed to act as a hedge by including these types of recession-resistant