Who Cares if Your 401K is Negative?!?

Remember the stock market crash just a couple years ago?

Remember when people nearing retirement pulled all their money out of their 401Ks because they were scared?

Look at the market now. It’s almost double what it was during 2009. The lesson here to is “stay the course.”

It’s simply foolish to pull out your investments because your 401K is starting to go negative. In fact, I’m here to tell you something: who cares if your 401K is negative!

Let’s Look at History

If one simply looked at the history of the stock market, they would realize that we always have booms and busts, but at the end of the day, the stock market is always on an upward trend. Our world is more complex than ever, and there are more opportunities for growth than ever before.

The Dow Jones Industrial Average Historical Chart

When you see a loss on your 401K portfolio, it’s simply a paper loss and momentary compared to the long term. Even if you are on the verge of retirement, you’re not going to take out all of your 401K savings right at the same time.

In reality, retirees need to get back to the basics and realize that money gone one day will be back tomorrow. Invest regularly and don’t panic when the market takes a tumble. Learn from history and use it to your advantage.

It’s a Buying Opportunity

Yes, your 401K account may be in the red, but it’s a buying opportunity. What do I mean by that? Well, markets go down and then they come up. It would be wise to increase the amount of money that you’re investing into your 401k during negative months.

It may seem counter intuitive but it makes complete sense. The more stocks you invest in when the market is cheap, the higher your long term gains will be. A rule of thumb for any investor is to invest when everyone else is running scared.

So stop worrying about your account, it’s a good thing that it’s in the red!

Don’t Pull Your Money Out!

A recent news story came out that talked about how over 30% of people with 401k plans have taken out a loan against it. This is shocking to me! Not only is this inhibiting long term gains for your retirement account, but you face massive tax penalties in the process.

It’s a bad habits Americans are developing and you should avoid it. Also, avoid cashing out your 401k when you’re scared. I know it’s hard to remember the long term, but it’s simply a paper loss for a moment.

Not only do you get socked with a 10% tax fee for early withdrawals but you face additional tax as income. You’re looking at over 30% tax penalties easy. Avoid this and don’t touch your 401K!

Dollar Cost Average on the Way Down

Let me share with you the concept of dollar cost averaging. It’s a relatively simple investment philosophy. Assuming you are a buy and hold investor, you probably invest on a regular basis into your 401k plan. When the markets are crashing, you are buying stocks.

When the market is gaining, you are buying stocks. In reality, you’re simply dollar cost averaging your investments. You might pick up stocks are low prices or you might pick up stocks at higher prices. It’s a solid way to invest.

So when your 401K is turning red, it’s actually a good thing since you’re picking up stocks at bargain prices. It all averages out in the end, no worries about a struggling 401K.

Nearing Retirement, What to Do…

If retirement is close and your 401K is in bad shape, you still don’t need to worry. Assuming the majority of your investments are in bonds vs stocks at this point, there are some other steps you can take to help you ease into retirement.

You might consider working an extra couple years and wait out the markets. This is a relatively low risk decision because markets always come back after a couple years. Another strategy would be to live on less during retirement.

This way, you could take out your savings right away at lower levels and get your retirement started. I would avoid this though, because market upswings happen pretty fast. It’s better to keep your money in the market and wait it out.

Trust the Tried and True Methods

Trust what has worked for years and will work for years into the future. Hold your 401k plans steady and refuse to take out a loan or cash out your investments, it’s just not worth it. Stick it out and you won’t regret it.