The coronavirus has sent stocks tumbling as much as 40% this year. Chances are, your 401(k) hasn’t been immune.
What if you were planning on retiring in a couple months? What if you just retired? Should you stop contributing?
Believe it or not, the answer might be to start contributing more…
What we have to offer you right now might not be good news, but it’s the next best thing: action.
If you’re one of the many suffering losses up to 40% in their retirement accounts, you have two choices.
One is to do nothing. Keep contributing to your account every two weeks, don’t panic, and wait for stocks to recover.
You could do that. But you could be missing a generational buying opportunity.
Instead of merely waiting and hoping, here’s what you can do…
How to Protect Your 401(k) from the Coronavirus Crash
First, you want to make sure you’re taking full advantage of your 401(k). If your employer offers matching contributions, then make sure you’re meeting the requirement to get all of it.
And since you don’t pay income tax on 401(k) contributions, it makes sense to keep contributing as much as you can. As long as you don’t need the cash for an emergency, then you still want to maintain your contributions even though stocks are down.
If you can afford, it you actually want to increase your contributions right now.
Money Morning Capital Wave Strategist Shah Gilani looks at this as the “last great buying opportunity” of a lifetime.
The long-term trajectory of stocks is always higher. So when a major event sends stocks dramatically lower – like the 2008 financial crisis did – you’ve got a rare opportunity to amplify your lifetime gains.
There’s no way to time the market bottom, but by regularly buying you’ll average into the bottom, which is why it’s a good idea to contribute even more during a downturn.
Even if stocks go further down after contributing more, you’re still investing at a bargain on average.
Better yet, if you have a self-directed retirement account, or any ability to move your positions around, you have an even better chance to profit.
It’s more than a simple “buy low, sell high” strategy.
Here’s what you do…
How to Balance Your 401(k)
Now that you’ve got your contributions squared away, it’s time to create a portfolio that will grow over the long term.
As you come out of the trenches, start focusing on stocks. If your 401(k) only lets you buy funds, invest in stock funds instead of bond funds or retirement year funds. If you can buy stocks in your 401(k), all the better.
Our favorite way to balance a portfolio is the 50-40-10 model. Money Morning Chief Investment Strategist Keith Fitz-Gerald recommends this to optimize your profits while balancing risk.
You start with 50% in foundational positions, defensive stocks that you believe can carry your portfolio through ups and downs in the future. Then it’s 40% growth stocks, globally recognized name brands with good balance sheets that pay dividends. Then, you reserve the remaining 10% for more speculative plays, like a flashy biotech.
This “pyramid” model protects your profitability while steering yourself away from common risks. You can do this with stock funds, too. Look for a dividend fund or something like the Vanguard Wellington Fund (MUTF: VWELX) as your base builder. Then look for a growth fund or tech ETF as your growth block.
Because you’re trying to balance your portfolio at 50-40-10, you might end up having to sell some winners if one of your growth positions really takes off.
That’s cause for celebration. If a biotech ends up making 50% of your portfolio, simply take the cash off the top and put it toward a defensive stock to stay balanced.
This is an essential part of why the pyramid works. If you don’t sell your winners in this way, you’re taking on more risk.
But that’s not quite the whole picture. Here’s how you can protect stocks from further losses…
Do this During the Coronavirus Crash
“Buy low, sell high” is still part of the deal. But it’s more a matter of when and what you’re buying.
You should continue to buy more shares of stocks that haven’t fallen too far. If they start taking up less of your portfolio, you would balance it by adding shares.
Shah Gilani points out that even if these stocks haven’t hit the bottom, you are “averaging down” your cost all while buying. And that’s ultimately how wealth is built.
Still, there is a point where you should sell some bigger losers as well. For this, Keith Fitz-Gerald recommends a trailing stop in case they go too far down. This just means you set a price in advance at which you would like your broker to automatically sell the stock for you.
There are plenty of winners and losers out there today. A crisis could even make them more pronounced. So make sure you can tell the difference between stocks that have lost too much, stocks that have lost but will gain in the future, and stocks that gain in a downturn.
— Mike Stenger
Source: Money Morning