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

November 12, 2023
minute read

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.

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.

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.

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.

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.

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.

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.

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.

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.

John Liu
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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