NEW YORK (MainStreet) — What a start to the year for the stock market.
Going from a Dec. 24 high of 18,030 to an end-of-January low in which the Dow Jones fell 866 points, or 4.8%, makes "volatility" the watchword for 401(k) investors.
In an anxious stock market, what can 401(k) investors do to stabilize performance?
One common denominator among Wall Street experts is that "panic" is a lousy investment strategy for retirement investors, who should always take a long-term view on their portfolios. After all, markets go up and down all the time, but over the long run stocks historically rise.
Panic aside — way aside — keep these themes in mind when dealing with jittery markets:Read More: With Retirement Investments, It's Crucial That You Difference Between Advisor, Broker
Make sure you're diversified. When it comes to your 401(k), just as with your overall portfolio, it's important to hold a diverse range of investments aligned with your goals and risk tolerance, says Catherine Golladay, Schwab's vice president of 401(k) services. "Some sectors are hit harder than others in times of market volatility, so you don't want to have all your eggs in one basket," she says.
Take an "opposite" approach. Legendary investor Warren Buffet has said he likes to jump in to a declining market as others flee, because that's where value can be found. That's a good idea, says Anthony D. Criscuolo, certified financial planner with Palisades Hudson Financial Group in Fort Lauderdale, Fla. "Some people see energy stocks crashing and sell everything," he says. "Others want to put everything in U.S. large-cap stocks like the S&P 500 index because it's done well over the last couple years. It's human nature to be overly optimistic or pessimistic in believing recent market trends will continue."
But "recency bias" is one of the most common and dangerous quirks of investor psychology. So go the opposite direction, he advises. "When you rebalance, sell your top performers and add to your laggards," Criscuolo says. "If you're underweight in natural resources and energy stocks, it's a great time to add to your holdings." He recommends putting 7.5% of one's equity portfolio in natural resources funds that invest in energy, materials and similar stocks.
Stay focused, and stay in the market. A big part of the "no panic" mantra is to stay in the market, largely no matter what's happening. "It's better to be in the market than out, and those who stayed invested in the stock market have seen great gains historically," says Joe Jennings, a financial advisor with PNC Wealth Management in Baltimore. "The idea is a simple, but effective one: Buy when stocks are cheap, and sell when they are expensive. We believe the market still has some legs, and recommend staying invested in stocks, relative to one's personal risk style and long-term goals."
Check your exposure to your employer's stock. Many investors are significantly overweighted in their own employer's stock, says Jon W. Ulin, founder of Ulin & Co. Wealth Management in Boca Raton, Fla. This is a significant risk, he says, and Ulin advises investors to review any exposure to company stock in your 401(K) and other retirement plans. "Many employees have a bit too much confidence in their own company stock — called familiarity bias — and may not be able to take action quick enough to diversify their portfolio if a negative change happens with their company stock," he says.
— By Brian O'Connell for MainStreet