401K-Be Prepared for Volatility

what you need to know 401k be prepared for volatility blog cover

Are you asking yourself this question?

What is happening to my 401K balance? Why is the value going down? The short answer is uncertainty equals volatility.

Currently, three major things are causing uncertainty in the 401K market, war, inflation, and the pandemic. Everyone wishes a quick end to the war and that the price of food, gas, and other items would come down. They wish that masks, vaccines, and social distancing would no longer be needed against the pandemic. The truth is, no one knows with certainty when these things will change.

Remember, uncertainty equals volatility.

Understanding the basics of investing can help you build a solid foundation for retirement and avoid the mistakes that compound the value loss in your 401K.

One of those basics is knowing the right thing to do and avoiding doing the wrong thing when volatility strikes. 

The following five things will help you STAY THE COURSE

Asset Allocation: 

It’s the process of determining how much to invest in the three basic asset classes of equities (stocks), fixed income (bonds), and cash equivalents (money markets). This is one of the most important decisions an investor can make and a major tool to combat volatility.

Diversification: 

Diversification is the process of choosing a variety of investments within each asset class. For example, you can invest in small, medium, or large company stocks within the equity asset class; having a broad investment base reduces volatility.

Risk Tolerance:

Risk tolerance reflects how aggressive or conservative you’re willing to be within your account. This is different for each person, so it’s important to understand what works best for you based on where you are in your retirement journey; the younger you are, the more risk you can take.

Rebalancing:

Rebalancing is the process of periodically moving money in your account to maintain your desired asset allocation and diversification. Over time, different investments grow at different rates, which can shift your portfolio. It’s a good idea to review and rebalance your portfolio to ensure it’s still aligned with your goals, time horizon, and risk tolerance. If you are not inclined to make those changes yourself, the 401K plan comes with PortfolioXpress, where the rebalancing is done for you once a quarter.

Dollar-Cost Averaging:

This step means making regular contributions to the same investment account over a period of time. Sometimes you may buy at a higher price. Other times you may buy at a lower price. Consistently making the same contributions over many years can reduce the average price of the investments in your portfolio, which can provide for greater long-term growth.

Compounding is a powerful concept that allows your investments’ earnings to be reinvested into your account to generate additional earnings. Regular contributions to your account over time allows for more potential compounding and possibly larger growth. 

PLAN FOR THE LONG HAUL 

Don’t be intimidated by volatility. Familiarize yourself with basic investing concepts and gradually expand your knowledge. Focus on long-term goals, not short-term performance, and keep investing steadily to let the power of compounding and dollar-cost averaging put time.

Participating in your employer-sponsored retirement plan is a great start to preparing for the future. But is the money in your account invested appropriately? How you invest your retirement savings plays an important role in determining when you’ll be able to retire. 

WHY SHOULD I INVEST? 

When you’re saving for retirement, it’s important to remember that due to inflation, $1,000 won’t buy as much in 10 or 20 years as it does today. Instead of putting the money you set aside in a traditional savings account, you’ll want to invest your saving, so it can potentially grow and outpace inflation over time. 

ALIGNING GOALS, RISK, AND REWARD 

The key balancing act to investing is aligning your goals, the number of years you have until you want to achieve those goals (referred to as time horizon), risk tolerance, and reward potential.

Have questions or are not sure what to do? Contact Derek Butler today for help on your 401K!

Derek Butler, CPFA

Financial Advisor 

OFFICE-866-887-2206

derek.butler@lpl.com

For further questions or additional information contact us! | (800) 940-8706 | learnmore@myHRpros.com |

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. Dollar cost averaging involves continuous investment in securities regardless of fluctuations in price levels. Investors should consider their ability to continue purchasing through periods of low price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
Derek Butler is a registered representative with, and securities and advisory services are offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.