Do’s and Don’ts in a Volatile Market

If the state of the market has caused you to worry, you’re probably not alone. The coronavirus and falling oil prices have caused many to panic. In times of uncertainty, it can be easy to make knee-jerk decisions and forget about the long-term. However, consider these do’s and don’ts in a volatile market.

Don’t withdraw early from your 401(k) or IRA. While this might seem tempting during volatile periods, it’s typically not a good idea to cash out of your 401(k). If you withdraw money before age 59 ½, you could have to pay the early withdrawal penalty of 10%.[1] If you are over 59 ½, you are not subject to the early withdrawal penalty. But keep in mind that withdrawals from a 401(k), IRA, or other traditional retirement plans will be taxed as ordinary income.

Do consider when you will retire and from where your income will come. If you're not already retired, think about the timing of your retirement when deciding on strategies to help survive volatile markets. Changing your investment strategy to prepare for retirement isn't something to leave until the last minute, or until after you retire. If you are already retired, it can help to have a plan, so you know where your income will come from for the rest of your retirement - not just the next few years.

Don’t make decisions based on emotions. This can be an easy trap to fall into when your financial security is at risk. You may want to pull all your money from the market when it drops in an attempt to save your investments, but it may be wiser to allow time for the market to recover. Making hasty decisions like that can be counterproductive for the long-run. One benefit of having an advisor is having access to someone who has dealt with market drops before. We can help you consider all your options, so you don't make a hasty decision based on panic.

Do review your asset allocation. For many people, shifting to lower-risk investments as retirement nears could be a good idea. Keep in mind that if you’re investing in a target-date fund in your 401(k), the allocation automatically becomes more conservative as your target retirement date gets closer. Making these considerations will mean preparing for the possibility of market drops, like those of recent and those that might happen over the course of a long retirement.

The recent market volatility might not die down as soon as the coronavirus panic does. Eventually, markets will rebound, but for those nearing and in retirement, this may not be soon enough. There will likely be other market drops in your lifetime, so consider planning for them. We can help you create a retirement plan that doesn’t overlook the possibility of major market drops.