The one thing that every investor is universally concerned with is protecting their money during a recession. Investing your money is all fun and games while financial markets are up and you’re making money. However, once the market flips and things start to take a turn for the worse you’ll instantly want to panic.
Luckily, there is a very straightforward strategy that you can use to protect your money during a recession. Let’s take a look!
What is a 401(k)?
If you’re not familiar, a 401(k) is defined as a tax-advantaged, defined-contribution retirement account offered by many employers to their employees in the US. Essentially, it is a retirement fund that employers set up for their employees and each year employees are allowed to contribute a set amount to the fund.
Since 401(k) plans are sponsored by your employer, you, unfortunately, have very little control over the investments that you own. Instead, it is up to the fund manager to consider the assets that the fund will invest in. This means that you will not be able to make changes to your 401(k) plan before, during, or after the recession.
However, there is one thing that you can control…the amount that you contribute.
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Be strategic with your contributions
Warren Buffet has a famous quote that goes “be fearful when others are greedy and greedy when others are fearful”. What he means by this is that when everything is going well and the stock market is up big, you should anticipate a drop. On the flip side, when it feels like your portfolio can’t sink any lower, this is actually the time that you should buy more.
This is great advice to incorporate into your portfolio. As a general rule of thumb, you want to contribute more to your account when things are going bad and contribute less when things are good. The most important thing is to never sell your assets when things are going bad. Doing this is essentially just selling your assets for much less than they’re really worth. Instead, if you can, try and ride out the bad market until things eventually rise again.
This sounds simple in theory but putting it into practice is entirely different. It goes against human nature to buy more stock (or contribute more to your 401(k)) when prices are declining.
A good way to get over this is to imagine that the stock market is just going on sale when it declines. When a store offers a big sale, people rush to buy the merchandise at a discount. However, when the stock market dips and puts stocks on “sale” hardly anyone rushes to buy. If you buy when things are at their worst then you will be poised to earn a much bigger return. Eventually, the market will turn around and you will be much better off because you bought more at the lowest price.
We hope that you’ve found this article valuable when it comes to learning how you can protect your 401(k) during a recession. If you are interested in learning more, please subscribe below to get alerted of new articles as we write them!