Column by Michelle Singletary
If you’ve looked at your 401(k) retirement portfolio, it’s likely you’re a bit seasick.
“Now, I don’t know a lot of financial jargon,” quipped Stephen Colbert on Monday’s “Late Show,” just after the Dow Jones dropped 890 points. “But let’s just say your 401 is not k.”
Nope, you are probably not feeling okay. On fears of higher prices from President Donald Trump’s turbulent tariff policy, and possibly even a recession, the markets had a day like the kid in the classic children’s book, “Alexander and the Terrible, Horrible, No Good, Very Bad Day.”
Understandably, investors are panicking after a stretch of terrific returns. A Charles Schwab report pointed out that 2024 “was a very good year.” The S&P 500 was up more than 23 percent, marking the second consecutive year with gains of more than 20 percent — the first time since the late 1990s.
If you’re an investor, experts caution that you should expect volatility in the stock market. That’s the risk you take for earning over time historically positive returns that you can live on in retirement or use to send your kid to college.
But the markets don’t like extreme uncertainty.
“Generally, the advice boils down to staying invested. But I firmly believe that just saying ‘stay invested’ doesn’t work on days when stocks are in free-fall and the world feels terrible,” said Callie Cox, chief market strategist for Ritholtz Wealth Management.
“We’re not robots, we’re humans with emotions and we need to honor that in times like these,” she added.
If the stock market is making your stomach turn, you risk taking action that’s not in your best interest. Here’s what you need to know depending on your stage in life.
Retired
Living off your portfolio can be scary, especially when stock prices are falling. But don’t let the current market pullback intimidate you, Cox said.
Stay invested if you’re early in retirement, she said.
You should also consider companies that “can stand strong in the face of a recession,” as well as “pick up fixed income and lock in those yields,” Cox said. “You have lots of agency here, so don’t feel trapped.”
If you’re actively spending from your portfolio, “de-risking” is key, said Christine Benz, director of personal finance and retirement planning for Morningstar and author of “How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement.”
“I like the idea of retirees holding 7 to 10 years’ worth of portfolio withdrawals in a combination of cash and high-quality bonds to keep themselves from having to touch stocks when they’re down,” she said.
If you can handle a lower withdrawal rate, Benz added, consider it a superpower in volatile markets.
“It helps ensure that more of the portfolio is in place to recover when the market does,” she said.
Five years away from your retirement
If you haven’t already, start shifting toward a more conservative allocation that’s heavier on high-quality bonds.
But you still need to invest for growth.
“Remember that even though retirement is a few years away, that is just the start of retirement,” said Corbin Blackwell, a certified financial planner and senior manager of financial planning at Betterment, a digital investment advisory firm.
She added: “For most people, their money needs to last decades, so don’t lose sight of your real-time horizon.”
However, people in their 50s and older can experience unexpected job loss, so it’s wise to have some cash and bonds without being overly conservative. Aim for something like 25 percent to 30 percent in high-quality short- and intermediate-term bonds, Benz said.
15 to 20 years before you need the money
I’ve been fielding a lot of questions from parents investing in 529 college savings plans.
“College savers should have no worries if they choose an age-based 529 fund,” said Tony Isola, a Ritholtz Wealth Management adviser and certified financial planner.
Similar to target date funds for retirement, an age-based fund invests aggressively at the beginning and then turns conservative about four to five years before the child turns 18.
“You can take a more hands-on approach, but that entails controlling emotions, which is much easier said than done in the face of volatile markets,” Isola said.
I’ve had far too many conversations with savers who have moved all their money out of stocks, including people who are a few decades away from having to withdraw their money for retirement or their child’s college education.
“Moving all your investment money to safer assets like cash or bonds during market volatility can feel reassuring, but it may carry long-term risks,” Blackwell said. “Historically, markets tend to recover, and pulling out during downturns can lock in losses and cause you to miss the rebound.”
If you have at least 10 or more years before retirement, “you should still be pretty aggressive with your asset allocation.” Benz said. “After all, stocks are in the black about 90 percent of the time.”
New to investing
“I know it feels scary, but you should take comfort in knowing that even the biggest stock market sell-offs in recent history have only taken five to six years to recover,” Cox said. “Cycles of joy and pain are the heartbeat of the stock market, and there’s a good chance we will build back better than before. History tells us as much.”
If you’re a young investor, time is on your side.
“More likely than not, you probably have some breathing room to take risks,” she said.
But “fill up that emergency fund first,” she recommends.
Not investing at all
Gallup asks Americans about their stock ownership as part of its annual Economy and Personal Finance survey. Its most recent survey, conducted last April, found that only 62 percent of U.S. adults have money invested in the stock market, including individual stocks, a stock mutual fund or a retirement savings account.
If you can afford it, invest.
Start small and invest a little at a time, Cox said.
“Downturns are your friend if you have been on the sidelines during this long stock-market rally, enabling you to put more money into the market at better prices,” Benz said. “Just be sure to stay globally diversified, because valuations are even better overseas than in the U.S.”