My 401(k) Is Losing Money—What Now?
Get perspective and decide what to do
Watching your 401(k) account balance drop can be disappointing and terrifying. You may feel anxious and upset about the decisions you’ve made, the state of the world, and your ability to reach your long-term goals. But before you react, review the big picture to gain insight into what might be happening and if it’s something you need to take action on, or not.
Is This Normal?
Stocks Lose Money Every Year
Although the markets have generally risen over time, stocks lose money almost every year—at least temporarily.
Since 1979, the U.S. stock market has fallen from its intra-year highs by about 14% (on average) every year. Still, the market ended up with positive returns in roughly 83% of those years. Temporary losses in the stock market are an unpleasant aspect of investing for growth, but a downturn doesn’t necessarily signal that your investment goals are shattered.
Bear Markets Have Always Ended (So Far)
Market losses of 20% or more, also known as bear markets, are a fact of life for investors. Since 1926, investors have suffered through at least 16 of them. The average decline was 39%, and the average length of a bear market was 22 months (some were more severe, and some were less severe).
You might take comfort in knowing that things have tended to recover in the past; it just took time. In the first 16 bear markets, U.S. markets were up an average of 47% one year after the bear-market bottom. That doesn’t mean investors necessarily recovered all of their money within one year, but they recouped some losses.
Time Heals Many Wounds
Over long periods of time, investors have historically experienced growth. The past does not predict the future, but in the past, short-term losses have typically been offset by larger long-term gains.
For example, in any one-year period dating back to 1950, investors have experienced total returns ranging from a 47% gain to a 39% loss. But looking at every five-year slice of history during that same period of time, the worst total return for an all-stock investor was a loss of 3%. And after diversifying among a mixture of stocks and bonds, there were no five-year periods with negative returns.
Over long periods, gains and losses can offset each other, and in general, investments have grown over the long term.
Should You Sell When Your 401(k) Loses Money?
If you sell your losing investments and switch to safer holdings, you may miss out on a recovery (if history repeats itself) and lock in your losses. Plus, you’ll need to decide if and when you want to get back in. That’s a difficult position to be in—you might not ever feel fully confident about investing, and by the time you sense the “all clear,” you may have missed a substantial recovery.
It’s best to make changes to your portfolio only when your goals or circumstances change. If you are currently invested in a well-diversified portfolio that you chose with long-term needs in mind, it’s often smart to ignore market volatility (unless your needs have changed). Of course, that’s easier said than done.
It’s impossible to know if you should sell now or try to ride out the market’s ups and downs. That's why it's usually best to make investment decisions based on your timeline and level of risk tolerance.
Tips for Long-Term Investors
Review Your Risk Level
Review your holdings to verify that you’re taking the right level of risk. Your risk tolerance has to do with how much loss you can stomach and how much time you have left until you retire. If you’re invested well outside your comfort zone, market losses can be harder to take. If retirement is only a few short years away, your portfolio doesn’t have as much time to recover.
A first step is to complete a risk tolerance questionnaire, which provides suggestions about investment strategies that might be appropriate for you. You don’t have to follow the suggestions to the letter, but going through the exercise can provide insight into your investing behavior and needs.
A middle of the road (or “moderate”) risk taker might have roughly 60% of their portfolio in stocks and 40% in fixed-income investments. As stock holdings increase, you become more aggressive. With less stock exposure, you are more conservative.
Make Sure You’re Diversified
If you’re heavily invested in just one or two investment categories, you might experience more volatility than if you spread your money around (or “diversify”).
For example, if you’re only in mutual funds with large U.S.-based companies, you might benefit from having exposure to large and small companies, both within and outside of the U.S. Different types of bond holdings can also provide ballast (and potential returns). A robust mix of bond holdings might include U.S. and foreign government bonds, corporate bonds, and other fixed-income strategies.
Diversification is based on the following idea: During any given year, some investments lose more than others—and some types of investments might go up, offsetting your losses. During 2008, for example, investors in stocks lost over 30% (substantially more in some sectors). But U.S. fixed income holdings gained 5.24%. Then in 2013, those “safe” fixed income holdings lost roughly 2%, while investors in U.S. stocks gained over 30%. The point is, a diversified portfolio can weather downturns better than one that’s not.
Within your 401(k) plan, you probably have several ways to diversify. Asset allocation funds can handle most of the hard work for you. These vehicles invest in numerous different areas, and your task is typically just to choose one. The funds might even have easy-to-understand names like the “Conservative” or “Aggressive” fund. But it’s best to examine the underlying holdings to understand how each fund works.
If you need help building a diversified portfolio with an appropriate risk level, ask your 401(k) provider or a fee-only financial advisor for help. You don’t have to do all of this alone.
If you’re invested in a money market fund or a fixed account and you’re still losing money, fees may be the culprit. 401(k) plans often charge fees to your account balance, which cover things like plan administration and recordkeeping. The question is whether those fees are reasonable.
Unfortunately, as an employee, you have little control over the fee structure in your employer’s retirement plan. However, you may have some control over other fees you pay. If your plan offers them, you can choose passive investments, often known as index funds, over actively-managed funds which tend to have higher fees.
If you’re concerned about fees, raise the issue with your employer. Employers are required to be aware of fees and ensure that any costs you pay are reasonable.
Now that you know that market downturns are normal (and usually temporary), how should you respond? That largely depends on whether or not you can tolerate the discomfort of seeing losses in your account. If not, it’s a signal you may want to adjust the level of risk in your portfolio. In many cases, it’s beneficial to ride out these periods and wait for markets to recover.
“Don’t just stand there, do something!” In many emergencies, that’s sound advice. But when stock markets get wild, the opposite might be better: “Don’t just do something, stand there!”
Taking action may feel like a path to regaining a sense of control, but the markets are beyond anyone’s control. The best you can do is pick an investment mix tailored to your long-term goals and expect that these things will occasionally happen.
The Balance does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.