How to Protect Your 401(k) From a Stock Market Crash

Corrections happen every one to two years when stocks decline 10% or more from their most recent peak and usually last several months.

Allocating the right amount of money to a diverse array of assets is crucial to protecting your 401 from a stock market crash, while also maximizing returns.

Having a diversified 401 of mutual funds that invest in stocks, bonds and even cash can help protect your retirement savings in the event of an economic downturn.

Investors who are more risk-tolerant will subtract their age from 120, while those who are more risk-averse will do the same from 100.

The idea is that over time, some investments may fare better than others, changing the percentage of money invested in each asset and potentially exposing you to elevated risk.

The easiest way to ensure your 401 is continually rebalanced is to invest in a target-date fund, a collection of investments designed to mature at a certain time.

Cash on hand can also mitigate what’s called “sequence of returns risk.” That’s the potential danger of withdrawing money early in retirement during market downturns and, thus, permanently diminishing the longevity of a retirement portfolio.

Steadily contributing to your 401 contributions during a period of growth when your investments have exceeded expectations is equally important.

Surrendering to the fear and panic that a market crash may elicit can cost you more than the market decline itself.

Spooked investors who pulled their money from the market in March 2020 missed out on the bull market that pushed the DJIA to record highs by November 2020 – just eight months later.

Protecting your retirement savings from a stock market crash requires you to pay special attention to your asset allocation and investment variety, rebalancing when needed.

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