What You Should Know About Your 401(k) Amid Global Stock Sell-Off
Here's what experts say you should know when stocks are tanking.
— -- When a global sell-off like that of today's causes you to swear off the markets for good, experts first advise the average investor not to panic.
Today, the Dow Jones industrial average fell more than 1,000 points at the opening bell, following worries that news of a slowdown in China may affect how much American companies can produce and sell.
Here's what you should know about your 401(k) and other investments affected by the U.S. stock market.
1. Relax
Mark Zandi, chief economist with Moody's Analytics, said American households with stock or retirement investments shouldn't run for the exit yet.
"Most importantly, the average investor should not panic," Zandi said. "If you are invested in stocks, you should have an investment horizon of at least four to five years and should look through any market volatility."
2. Consider Waiting It Out
Just because stocks are seeing red doesn't mean you should sell, sell, sell.
Investors who sold at the market bottom in 2009 would have missed out on one of the great bull markets in history, notes former vice president at Credit Suisse First Boston Darren Kisgen. Stocks are up about 180 percent since then, even accounting for today's fall.
"The price of entering the market has just gotten cheaper, and the world isn’t that different from what it was a week ago," said Kisgen, now Boston College Carroll School of Management associate professor of finance. "Getting the timing right on when to enter and exit is tricky though, so most investors are best off investing for the long run and doing their best to ignore short-term changes in prices.”
3. Know Your Risk Level
The "most important" rule of investing in any market environment, according to Adam Morgan, senior investment advisor with PNC Wealth Management in Raleigh, North Carolina, is to make sure your investment portfolio is aligned with your investment risk tolerance.
Your goal should be to find the right mix of asset classes -- such as stocks, bonds and cash -- that align with your unique circumstances, Morgan said.
While older investors with a 401(k) or another investment vehicle may be feeling anxious about their retirement, this could be an appealing time for younger investors with more an appetite for risk.
"If you are young and not invested in stocks, this may be a good time to start," Zandi said.
4. Keep It Diverse
Every class of publicly-traded assets, whether domestic or international stocks, bonds, or even commodities, exhibits volatility, Morgan noted. However, volatility affects those different asset classes at different times and to varying degrees, he said.
5. What Are Your Objectives?
Morgan said an acronym to keep in mind when setting investment objectives is TURTL:
Time horizon (such as, how long you want to keep your money invested)
Unique circumstances (having a special needs child, for example)
Risk tolerance
Tax implications
Liquidity needs (such as, rainy day funds or anticipated cash needs)
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