What to Do if Your IRA Loses Money

Quick Answer

You can expect your IRA balance to fluctuate up and down between now and retirement due to interest rate changes, inflation, politics and other factors. What matters most is staying invested in a way that supports your long-term goals and risk tolerance, such as through diversification.

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Retirement accounts are generally considered safer investments, but they can still lose money. That includes 401(k)s and individual retirement accounts (IRAs). During the second quarter of 2022, for example, average IRA balances decreased nearly 18% from a year earlier, according to Fidelity Investments' data.

As the market moves up and down, you'll likely notice gains and losses in your 401(k) or IRA―but that doesn't necessarily mean you should change your overall investment strategy. Let's cover the basics of why an IRA may lose money, along with some strategies for what you can do about it.

Why Did My IRA Lose Money?

Market hiccups are a normal part of investing and can be caused by all sorts of things. At the beginning of the COVID-19 pandemic, the S&P 500 dropped by about 34% in just one month. However, it went on to reach record highs soon after. These kinds of short-term swings are just part of investing in the stock market. Longer declines are also possible, but the market has historically bounced back.

During a market downturn, you may notice your IRA balance decreases in kind. That means the assets held within your IRA have declined in value. An IRA can hold all kinds of securities, from stocks and bonds to mutual funds and exchange-traded funds (ETFs). As those assets go up and down in value, your IRA balance will fluctuate right along with it. This isn't always a bad thing. If values go up and you sell securities for more than you paid for them, you'll turn a profit if your gains are greater than your tax liability. But it's a double-edged sword—you could also lose money if values drop and never rebound.

Aside from market volatility, here are some other reasons an IRA might lose money:

  • Interest rate changes: The Federal Reserve has increased interest rates six times so far this year. Rate changes can indirectly affect investments. When the cost of borrowing money goes up, consumer spending tends to decline as a result. Business loans may also become more expensive, making it harder for companies to reach their revenue goals. These factors could cause stock values to drop.
  • Inflation: Raising interest rates can help curb inflation. Again, consumers tend to spend less as rates go up, which can keep price increases in check. But inflation reduces your purchasing power and eats away at the value of your nest egg. If you have $100,000 in an IRA today, and inflation continues to increase until you retire, those dollars won't go as far in retirement.
  • Politics: Domestic and global politics can indirectly affect IRA balances. As Russia-Ukraine tensions escalated in early 2022, for example, the S&P 500 dropped by more than 10%. Political uncertainty can cause uneasiness among investors. That, in turn, can cause stock values (and IRA balances) to decline.

What Can I Do if My IRA Has Lost Money?

Stay Invested

Watching your IRA balance decline can be nerve-racking, but panic selling your investments could come back to bite you. The temporary stock market dip we saw early in the pandemic is a great example. Those who offloaded investments and stayed on the sidelines missed out on the record growth that followed soon after. From 2011 to 2020, the S&P 500's average annual return was 14.4%, according to the American Enterprise Institute.

Trying to time the right moment to re-enter the market is all but impossible. When it comes to your investments, it's best to make choices that are aligned with your long-term financial goals and personal risk tolerance.

Diversify Your Portfolio

In the face of IRA losses, ask yourself if your investment portfolio is as diversified as it could be. If the bulk of your investments are in one asset class, economic sector or geographic region, you might consider mixing in different types of securities. Doing so can spread out investment risk and provide more stability. If one area of your portfolio declines in value, you might have gains in other areas that balance things out.

That's where rebalancing your portfolio comes in. You can do this by selling off high-performing investments and redirecting the gains. Alternatively, you can put additional funds into under-performing asset classes. One rule of thumb is to revisit your asset allocation on an annual basis.

Lead With Your Risk Tolerance and Financial Goals

Investments are never a sure thing, but some are riskier than others. Diversification means having a healthy mix of high- and low-risk investments. Going too extreme in either direction isn't wise. Investing strictly in high-risk, high-return assets leaves you vulnerable to losses. Meanwhile, playing it too safe could cut you off from future returns. A financial advisor can help clarify your risk tolerance. Most robo-advisors will also use a risk assessment when generating your investment strategy.

Your long-term financial goals will likely come into play as well. Younger investors who are further from retirement, for example, may feel comfortable taking on more investment risk. If they lose money, they have more time to recover before retiring. Folks who are closer to retirement might prefer safer investments.

Tips for Risk-Insulating Your Retirement Savings

You can't eliminate investment risk altogether, but you can take steps to protect your retirement funds as much as possible. That might include:

  • Investing widely and wisely: Diversify your portfolio and rebalance regularly.
  • Paying down debt: The cost of high-interest debt can chip away at investment gains. The goal is to set money aside for the future while paying down debt at the same time.
  • Partnering with a financial advisor: They can evaluate your long-term financial goals and retirement timeline, then help you create an investment strategy that's aligned with both.

The Bottom Line

You can expect your IRA balance to bounce up and down between now and retirement. It's par for the course when investing and can be caused by a variety of factors. What matters most is staying invested in a way that supports your long-term goals and risk tolerance. Diversification is a key part of that endeavor.

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