Managing Retirement Savings in Volatile Markets


What should you do about big losses in retirement accounts?

The typical 401(k) account balance fell between 19 percent and 25 percent this year through mid-October, according to the Employee Benefit Research Institute.

Conventional wisdom suggests that you stay the course and not sell out of downtrodden investments, only to see them rebound when the economy recovers.

Selling out at the lows may not be the answer, but who knows where the bottom is in these turbulent financial times?

Historically, the stock market has served as a leading indicator of what's going on in the economy. The market declines presage a recession, but don't predict the length or severity of the economic downturn.

Not sure what to do? Below I address several issues relevant to all investors, regardless of age. In a separate article, I offer age-specific advice about managing your retirement investments in turbulent financial times, focusing on four life stages that span from early career to retirement.

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1. Keep contributing
If you're still working, stopping contributions to your retirement account isn't the answer. This is especially true if your company matches all or part of your contributions to a 401(k) or 403(b) plan.

Companies commonly match 50 cents on the dollar for up to 6 percent of salary contributed to their plans. That gives you a 50 percent return on your money without any angst at all about markets or investing.

Even if your employer doesn't match your contributions, if you stop contributing, you stop working toward the goal of a financially secure retirement. You can dial down the risk in how you're invested if that's appropriate for your situation, but getting out of the habit of contributing creates its own set of problems down the road.

2. Stay diversified
Markets are virtually impossible to time and they don't all move together. Being invested across markets allows you to participate in market upswings -- as well as market downturns.

Financial securities are commonly broken down into stocks, bonds and cash, with cash being shorthand for investments in money market instruments -- not currency. Stocks, bonds and cash represent separate asset classes, and within the stock and bond categories there are even more asset classes.

In the late '90s, investors flocked to the stock market because of the high returns it generated. The music stopped and the stock market was no longer the place to be. In the new century, real estate came to the fore and investors focused on buying properties. Again, the music stopped, and the real estate market was no longer the place to be.

Rather than play musical chairs with your investments, invest across asset classes by diversifying your investments and periodically rebalance your holdings to bring them back to a target asset allocation.

3. Rebalance your portfolio
"No tree grows to the sun." Rebalancing your portfolio involves pruning your winning positions and using that money to buy into underperforming assets at regular intervals to bring you back to your target asset allocation.

Calendar rebalancing takes place on a periodic basis, whether quarterly or annually. Percentage-of-portfolio rebalancing takes place when an asset group is over or under the target asset allocation by a stated percentage amount. For example, if you're targeting stocks to be 50 percent of your portfolio and they currently represent 35 percent of your portfolio, you would need to reallocate your portfolio, bringing stocks back to 50 percent of your portfolio valuation.

Read More: Why Pay Income Taxes on Losses?