Why Babysitting Your 401(k) Can Be a Bad Idea
With the uncertainty surrounding the United Kingdom’s referendum vote to leave the European Union — the so-called “Brexit” — wreaking havoc on markets around the world, now is likely a really bad time to look at your 401(k), IRA, or other retirement account balance. In fact, if you’re still several years from retirement, you probably shouldn’t be “babysitting” your account at all. Keeping too close of an eye on your long-term investments can not only cause you unnecessary strife but could also lead you to make poor knee-jerk financial decisions.
Retirement accounts are intended to sit and grow over the course of 30+ years. As a result monitoring the day to day gains or losses as the market swings is mostly irrelevant. Unless you’re nearing retirement age when you’ll need to start pulling your money and putting it into low to no-risk accounts, you shouldn’t hit the panic button if your balance happens to slip.
Think of it this way: if you’re currently contributing to your 401(k) or IRA, the lower stock market could actually be good for you. How? As you’re putting money into your account you’re able to purchase stocks at a lower rate. This means that you could stand to make even more money once the market rebounds.
Sometimes it only takes the market a few weeks to recover from a selloff. That was the case in August 2015 when the Dow closed nearly 600 points down on Black Monday only to rally in September. In the case of more serious setbacks like in 2008 it can take a considerable amount of time to bounce back. However, with the benefit of hindsight, we can now see that 401(k) investors who stayed the course through the turbulent times of 2008 and 2009 actually came out on top.
For younger Americans staying the course is easy. So what do you do if you’re nearing retirement? While this particular crisis may soon pass, it may be a good reminder to look at how your money is invested and ensure that it matches your tolerance for risk. If you’re worried about market volatility as your career life winds down you may want to speak to a financial advisor to determine your best options.
While it may be tempting to re-balance your retirement account whenever the stock market experiences a selloff, that could actually end up costing you a lot. Moving your money away from the market when it’s low is just locking in losses and hindering your ability to make that money back. Instead history has shown us that staying the course typically pays off in end. So stop babysitting your account or worrying about it daily — just let the market play out.