The money in your 401k is the money that you will eventually be living on during your retirement years and as such, you are probably very protective of it. During a down economic market, you may feel like you need to move the majority of your portfolio away from stocks and put it into something safer. Whether or not you should do this depends on your situation and your outlook on risk.
Moving When Down
When the stock market goes through a down period, many people panic and move everything in their retirement accounts into bonds. You should never move your money out of stocks because of panic. If you sell your stock after a decline, you are essentially giving money away. Waiting out the down period is often the best course of action so that you can make a logical decision and avoid selling at a loss.
Age
When you are deciding whether you should invest in stocks through your 401k, consider how close you are to retirement. If you are 20 years old and you have many more years before you are ready to retire, investing in stock makes a lot of sense. If you are only two or three years away from retirement, you may want to put your money into something safer, such as bonds.
Risk Tolerance
Something else to consider when making this decision is the level of risk tolerance that you have. Some people are more comfortable with risk. If you worry about the money that you put into the stock market, you most likely are not cut out for stock investing. Instead of putting your money into stocks, you may want to look at money market instruments or the bond market. This will allow you to stay comfortable throughout the investing process.
Stock Funds
Another option that you may want to consider instead of investing directly into stocks is buying shares of equity mutual funds. Many 401k plans offer a plethora of mutual funds that invest in stocks. By using these funds, you do not have to worry about picking individual stocks and you can leave that up to a fund manager. You also get a highly diversified portfolio by investing in mutual funds, which lowers your overall risk as an investor.
