Simple, Time-Tested Ways to Protect Your 401(k) from a Crash

You’ve saved all your life to build up your 401(k) plan, and now in this period of stock market turbulence you’re worried about substantial losses. What can you do?

Of course, you can’t control what happens in the stock market, so focus on what you can control: yourself. Follow these simple tips to minimize your losses and maximize the chances that you’ll stay on track for a secure retirement.

Tip #1: Diversify (Duh!)

Yes, you’ve heard it before, but it bears repeating: One way to protect your portfolio is to stick with the tried-and-true strategy of staying diversified.

It’s very unlikely that if you’re spread out over a number of different investment asset classes that they’ll all fall the same amount, and you might even see some go up. The idea in being diversified is to increase the odds that your overall return will do better in a market drop than if you overweighted in a small handful of investments that happened to fall hard.

Be sure to rebalance your portfolio once a year to bring the percentage of money invested in the different funds back in line with your original asset allocation. This will prevent overweighting in areas of the market that may do well for a while but then end up dropping, which could subject you to bigger losses.

Tip #2: Keep Contributing During Downturns

Another important thing you can do to mitigate market losses is to continue contributing on a monthly basis into your 401(k) plan even as the market is going down. This allows you to buy stocks at a cheaper price to compensate for some of the stocks that you may have bought at a higher price.

This is a form of dollar cost averaging, which most of the time will help you get an average price on your shares that will be lower, compared to someone who gets rattled and discontinues buying shares every time the market goes down.

Tip #3: Know Your Risk Factor

One of the best remedies to make sure you don’t panic and pull your money out of the market after a big drop is to assess your risk tolerance, preferably…

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