This post is part of a series where personal finance expert Dan Solin looks at money moves that may seem smart in tough economic times, but are actually quite dumb. See all 12.It is a tough time for participants in 401(k) plans. They dread opening their statements and seeing their declining account balances.
Is this the right time to move your 401(k) funds into more conservative investments?
The answer is a resounding "no"!
Your 401(k) plan is intended to fund your retirement. You cannot access it without penalty before age 59 1/2. By definition, for most employees, it is a long-term investment.
By switching into a portfolio that is too conservative, you are compounding the problems inherent in a system that is already rigged against you. Most 401(k) plans charge excessive, indefensible fees and have poor, under-performing, investment options. The primary beneficiaries of these plans are employers (who offload the cost and responsibility for securing the retirement of their employees) and the mutual fund industry (which gouges the $6 trillion in assets in these plans with unconscionable fees and expenses).
For many employees, the funds in their 401(k) plan are already invested too conservatively. The typical employee in her twenties, who obviously has a long time horizon and can afford significant market risk, invests only 50.4% of her account in stock mutual funds. A significant percentage of the same age group has no investments in any stock funds.
If you have any hope of reaching your retirement goals, you need to have exposure to the stock market that is consistent with your investment objectives and tolerance for risk.
Short-term market volatility is not a reason to move to a more conservative portfolio within your 401(k) plan.
Don't do it.
Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books, 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, 2008).
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