If you’re anxious about your 401(k) after the recent stock market decline, you’re not alone.
The S&P 500 ended last week down more than 10% from its recent peak in July, pushing the stock index into correction territory, a troubling milestone for the millions of Americans who invest in one of the many mutual funds that use the index as benchmark instrument, reflecting its performance.
The index of 500 leading U.S.-traded companies ended at 4,117.37 on Friday, down 10.3% from its recent high on July 31. The technology-based Nasdaq Composite Index corrected earlier in the week, closing at 12,643.01.
While the S&P 500’s decline may make people concerned about the performance of their 401(k), market experts say investors should remember that declines are often short-lived.
While the last three months haven’t been pleasant for investors, it’s important to remember that corrections are normal and happen quite often, said Ryan Detrick, chief market strategist at financial services firm Carson Group.
What is the correction area?
Corrections happen when the market is down at least 10% from its recent high, which means investors are skeptical about what’s next for the stock.
This is more severe than a correction (typically a short-term decline of less than 10%), but it does not constitute a complete bear market (a decline of 20% or more that can result in significant losses for investors).
Corrections occur on average every few years, including during the 2009–2020 bull run.
Why is the stock market falling?
The decline comes as rising Treasury yields make the bonds more attractive to investors who are exiting stocks now that the 10-year bond rate recently topped 5% for the first time since 2007, and amid a range of economic and geopolitical problems, such as rising tensions in the Middle East.
Detrick said that while the recent weakness has hurt stocks, investors should remember that in the January-July period, the S&P 500 posted its best first seven-month performance since 1997 at the start of the new year and that “some kind of ‘return back’ was not it’s too surprising.”
Stock market movements:Profits by big tech companies are dragging down the S&P 500 index.
What does the adjustment mean for me and my 401(k)?
Investors should keep in mind how quickly the market tends to recover, says Sam Stovall, chief investment strategist at CFRA Research, an investment research and analytics firm. He said it usually takes about a month and a half to get back to breakeven, corrections take four months and bear markets with declines of 20% to 40% last 13 months.
Will the stock market rebound?
They should remember the phrase: “This too shall pass,” he said. If an investor isn’t 13 months old, they probably shouldn’t own the stock.
If investors take any action during a stock market decline, Stovall suggested they should consider:
- Rebalancing their portfolio
- Buying high-quality stocks that have fallen in price with the market
- Tax-loss harvesting, which means selling stocks that are losing money and using the loss to offset capital gains or gains made on other holdings.
But his final suggestion?
Sit on your hands. Because the last thing you want to do is make an emotional decision,” he said. “You want to make sure your emotions don’t become your wallet’s worst enemy.
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