Momentum - Business to Business Online Magazine MOMENTUM October 2019 | Page 14
FINANCIAL FOCUS
KRISTI TREVINO
Financial Advisor
Edward Jones
www.edwardjones.com
DON’T CHANGE 401(K)
MIX During Market Drops
A
s you’re well aware, we’ve seen some
sudden and sizable drops in the financial
markets in 2019. While market volatility is
nothing new, the recent plunges happened
during a period of general political and
economic unease. Still, it can be harmful to overreact
to such events – especially if it means making radical
changes to your 401(k).
And yet, many people do just that. During market
downturns, investors often move money from their
401(k)’s stock accounts into perceived safer
accounts, such as those primarily
containing bonds or other fixed-
income securities. This move may
result in reduced volatility on your
401(k) statements, and if that’s all
you want, you might be satisfied.
But you do need to realize the cost
involved – specifically, fixed-income
investments will not provide the
same rate of return that equities
(stocks) can. So, if you liquidate
some of your equity holdings,
you may slow the growth
potential of your 401(k),
which, in turn, could slow your
progress toward your long-term financial
goals. Furthermore, if you get rid of substantial
amounts of your equities when their price is down,
you won’t be able to benefit from owning them
when their value goes up again – in other words,
you’ll be on the sidelines during the next
market rally.
Here’s the key issue: A 401(k) or similar
employer-sponsored retirement plan is a
long-term investment account, whereas
moves made in reaction to market drops
are designed to produce short-term
results. In other words, these
types of actions are essentially
incompatible with the ultimate
objective of your 401(k).
Of course, when the market is volatile, you may want
to do something with your 401(k), but, in most cases,
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you’re far better off by sticking with the investment
mix that’s appropriate for your goals, risk tolerance
and time horizon. However, this doesn’t mean you
should never adjust your 401(k)’s portfolio. In fact, you
may well want to make some changes under these
circumstances:
• You’re nearing retirement – If you are nearing
retirement, you may need to prepare your 401(k) for
future downturns – after all, you don’t want to
have to start taking withdrawals when
your portfolio is down. So, if you are
within, say, five years of retirement,
you may need to shift some, but
certainly not all, of your assets from
growth-oriented vehicles to income-
producing ones.
• Your goals have changed –
Even when you’re many years
away from retirement, you
probably have an idea of what
that lifestyle will look like. Perhaps
you plan to travel for several
months of the year or purchase a
vacation home in a different climate.
These are expensive goals and
may require you to invest somewhat
aggressively in your 401(k). But you
could change your mind. If you were
to scale back your plans – perhaps more
volunteering, less traveling – you might be
able to afford to “step off the gas” a little
and invest somewhat more conservatively
in your 401(k), though you will always
need a reasonable percentage of
growth-oriented investments.
By responding to factors such as
these, rather than short-term market
declines, you can get the most
from your 401(k), allowing it to
become a valuable part of your
retirement income.
This article was written by Edward Jones for use by
your local Edward Jones Financial Advisor.