6 Ways To Protect Your 401(K) During a Recession

For many months, there has been speculation about a potential recession in the United States.

Nobody knows if a downturn is coming, but it might be best to prepare yourself financially in case one occurs.

Consider these things as you try to protect your 401(k) during tough economic times. As always, you should consult with an investment advisor who can help you plan for your own situation.

This may be one of the most difficult pieces of advice to follow, especially if the stock market plunges and your portfolio declines. Still, during a recession, you might want to avoid making quick or big changes to your 401(k).

History shows that people who have seen their 401(k) balances plunge have also watched them recover later. Of course, that recovery might not happen as quickly as you would like.

If you are unsure about how to handle a downturn, talk to a financial advisor.

Most experts advise against trying to guess where the stock market is headed and making investment decisions based on such guesses.

This is known as trying to “time the market,” which rarely works out well.

This one may take some discipline, but you might want to contribute to your 401(k) even when an economic downturn or recession is on the horizon.

While it may be tempting to pause contributions, many financial experts advise against this, as it's just another example of trying to time the market.

If you decide to stay in the market, there is a good chance you'll suffer some short-term losses. If that happens, you'll have to wait patiently for your investments to recover.

Most investors who have waited for stocks to recover in the past have been rewarded. Of course, there is no guarantee that the future will be like the past.

Any time you take out a 401(k) loan, you put your retirement at risk: The money that would otherwise grow in your 401(k) is now outside the account and no longer helping you get closer to retirement.

There are times when a 401(k) loan might make sense. But before taking the plunge, consider speaking with a financial advisor.

A recession is never good, but it can have a silver lining.

For example, if your portfolio plunges, pay close attention to how you react. This can be a good lesson that teaches you about your risk tolerance level.

If you learn that you tend to become fearful during market losses, it might suggest that you need to dial back on the risk in your portfolio. 

While you probably want to try to maximize your retirement savings, there's no sense in taking so much risk that you can’t sleep at night.

By thinking about ways to protect your 401(k) during a recession, you might be able to eliminate some money stress.

Just remember that nobody can control where the economy — or the stock market — is headed. If you are unsure how to weather a recession, speak with a financial planner or other professional.