What to Do if Your 401(k) Is Losing Money

Quick Answer

When your 401(k) loses money, you may not need to do anything. Depending on your situation, though, you may consider taking steps to reduce your portfolio's exposure to risk.

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If your 401(k) plan is losing money, there are many potential reasons, including regular volatility in the financial markets. While some factors are outside of your control, there may be some that you can evaluate and consider addressing.

Depending on your situation and investment goals, here are some steps you can take if your 401(k) is losing money.

1. Don't Panic

Investing for retirement is a long-term venture, and while the financial markets can experience significant volatility in the short term, they tend to rise in value over the long term. Even if you're nearing retirement age, rash decisions can make it more difficult for your portfolio to recover.

While it can be scary to see your 401(k) balance go down, avoid making impulsive decisions about your portfolio based on fear or anxiety about the future.

2. Investigate the Reasons

Take a step back and try to understand why your 401(k) balance dropped. Look at your portfolio, then read investment news to get an idea of what's happening and which trends or other indicators may be influencing your return.

If you're experiencing short-term fluctuations and there's no threat of a long-term economic downturn, you may simply need to be patient as your portfolio recovers. If a recession or stock market crash appears imminent, on the other hand, you can then consider other potential steps you can take—again, without panicking—to adapt. This may be particularly important if you plan to retire within the next few years (more on this below).

That said, it's important to avoid taking the opinion of just a few. The stock market and the economy are complex systems, and it's common for so-called experts to spread doom and gloom at the first sign of trouble. Make it a priority to read news and analyses from a wide variety of sources to get a full picture of what's going on. Also keep in mind that the stock market has produced an average annual return of about 10% over the past century.

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3. Evaluate Your Risk Tolerance

Risk tolerance is essentially the level of risk you're willing to take with your investment portfolio. If you're a young professional and retirement is decades away, for instance, your priority may be to accumulate as much wealth as possible.

As a result, you can afford to take on a lot of risk in exchange for a greater return potential, and you'll have more time to make adjustments to your strategy.

In contrast, if you're only a few years away from retirement, your goal may be to preserve the wealth you've accumulated over your career. As such, you may have a lower risk tolerance because your portfolio will have less time to recover if it takes a significant hit.

Take some time to think about your time horizon—when you plan to start taking withdrawals from your retirement fund—and how you feel about investment risk in general to gauge whether your investments align with your risk tolerance.

4. Look for Opportunities to Diversify

Whether you have a high risk tolerance or a low one, diversifying your portfolio is one of the best ways to minimize your exposure to unnecessary risk.

If you want the majority of your 401(k) funds in stocks, for instance, consider mutual funds and exchange-traded funds with stocks in a variety of sectors—say, tech, utility and international stocks—so that your return isn't tied to the performance of a single industry.

If your employer offers a direct investment program in the company's stock, evaluate the company's performance and determine whether you should shift some of your contributions into other, well-diversified investment options.

Even if you have a high risk tolerance, it can still be beneficial to spread out your investments across multiple asset classes, such as stocks, bonds and real estate. This can help mitigate some of the impact a downturn in one asset class can have on your returns.

5. Consider Financial Advising

As your retirement plan grows, it could be a good idea to consult with a financial advisor. A good financial advisor can help evaluate your 401(k) portfolio and give you some guidance based on your personal circumstances and objectives. If you have an individual retirement account or other investments, they may even be able to help you manage those portfolios.

As you near retirement, an advisor can also help you ensure that you're preserving as much wealth as possible, so you can stay on track with your goals.

Keep in mind, though, that financial advisors can wear many hats. While some specialize in investment management, taxes or estate planning, others may provide broader financial planning services, giving you a comprehensive plan for your financial situation.

The Bottom Line

Watching your 401(k) balance go down can be a stressful experience. To avoid making matters worse, however, it's crucial that you take the time to assess the situation, evaluate your portfolio and investment strategy and take steps to reduce unnecessary risk.

If you're overwhelmed or want to make sure you're on the right path, consider working with a financial advisor to get objective, personalized advice for your situation and goals. Make sure you stay on top of your savings and continue to maintain your credit while in retirement.