Your 401(K) is running behind. Here’s What You Should Do.

The widely relied-upon investing strategy that millions of Americans use to ensure a comfortable retirement hasn't been performing well recently. Despite this, experts suggest sticking with the traditional approach of maintaining a diversified portfolio of stocks and bonds, even in the face of challenges such as three consecutive years of losses in the bond market.

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The confidence in this strategy has been rattled, especially with government bond yields currently at around 5%. Some individuals are contemplating shifting money from stocks to bonds. However, financial advisers caution against making impulsive changes to investment plans, emphasizing that most investors have a poor track record of successfully timing the market.

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William Bernstein, a financial adviser and author, advises against altering a strategy solely based on a couple of bad years. He emphasizes the importance of selecting a reasonable investment mix and staying committed to it, acknowledging that even the best strategies may experience occasional downturns.

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The temptation to intervene in one's 401(k) is understandable, given that a balanced portfolio lost 15.5% in 2022. Despite this, financial experts stress that meddling with one's investment approach can often lead to worse outcomes than maintaining a balanced portfolio. While bonds have performed poorly in recent years, both bonds and stocks play crucial roles in building retirement security.

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Many Americans have invested a significant portion of their 401(k) savings in target-date funds, designed to automatically shift from stocks to bonds as retirement approaches. Despite recent struggles, these funds are praised for their set-it-and-forget-it approach, with financial experts recommending leaving investments untouched for long-term wealth building.

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Recent market fluctuations, such as a 17.3% drop in 2022 for portfolios targeting retirement in 2040, highlight the challenges. However, target-date fund investors who refrained from trading experienced minimal losses compared to those who frequently traded their holdings.

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Despite the recent poor performance of bonds, financial advisers argue against giving up on them entirely. Bonds historically provide a hedge when stocks decline, and their long-term value is likely to endure. Selling bond funds at this time is cautioned against, as locking in losses may hinder potential gains from higher future yields.

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Considering the current environment, retirees are advised to explore short-term Treasury bonds or Treasury inflation-protected securities (TIPS). Short-term Treasury bonds are less sensitive to interest rate changes, while TIPS offer protection against inflation by adjusting the bond's principal. Despite short-term challenges, experts believe that holding onto bonds, particularly TIPS, can contribute to easier retirement income planning in the long run.

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In conclusion, despite recent market challenges, financial advisers advocate for maintaining a steady and diversified investment approach, cautioning against impulsive changes that may adversely affect long-term financial goals.