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Riding Your 401(k) Through the Market's Rollercoaster Ride

02/03/2015 12:10 pm ET | Updated Apr 05, 2015

We're only a month in, but 2015 is already off to a wild start in the financial markets. From market-moving geopolitical events overseas to major swings as oil prices fell at home, there is plenty of uncertainty among investors. Amid such highs and lows, 401(k) investors may be wondering what -- if anything -- they should be doing with their retirement savings.

In such volatile times, it's important to remember that panic isn't a strategy, especially with an investment as long-term in nature as a 401(k). While paying attention to the market is important, it's more important to put things into proper perspective. Markets go up and markets go down, but although past performance does not guarantee future results, history has shown that over the long haul, they go up.

That said, there are a few steps you can take during these tumultuous times to make sure your financial house remains in order and your 401(k) is in line with your financial objectives and risk tolerance. Following are the questions you should ask yourself about your 401(k) in times of market uncertainty:

  • Am I properly diversified? When it comes to your 401(k), just as with your overall portfolio, it's important to hold a diverse range of investments aligned with your goals and risk tolerance. Some sectors are hit harder than others in times of market volatility, so you don't want to have all your eggs in one basket. For instance, you may love your company and own stock in it, but make sure you're not allocating more than 20 percent to it, as your industry might be particularly impacted by market downturns while others perform better.

  • Do I need to rebalance? Every investment plan, including a 401(k), requires periodic maintenance. Swings in the markets may leave your 401(k) asset allocation out of whack. Market spikes may skew your allocations if stocks, for example, either underperform or outperform bonds and other kinds of investments in your portfolio. In volatile periods, check that you've still got the right mix of asset classes to give you the balance of potential growth and risk appropriate to your situation. Many plans now offer tools that will automatically rebalance your account.

  • Am I chasing performance or running away from underperformance? If your answer is yes, rethink your approach. Remember, a 401(k) is a long-term commitment, and focusing on your retirement goals can help you keep a clear head during volatile markets. Just because a specific fund is doing well today doesn't mean it will be doing well tomorrow, and vice-versa. You should develop a strategy based on your personal situation, then stick with it. Even when foreign markets are down, for example, international investments can still play an important role in a properly diversified portfolio.

  • Is it time to call in a professional? While investing can be tricky in any market conditions, volatile markets can be especially tough to navigate. This is a great time to take advantage of any professional investment advice that may be available as part of your 401(k) plan. A financial professional can help you understand what makes the most sense for you in terms of rebalancing, diversification, how much to save and where to invest. A recent survey* found that 70% of participants said they'd feel more confident in their ability to make the right 401(k) investment decisions if they enlisted the help of a financial professional - and if you're like me, you could use a confidence boost when the markets are so unpredictable.

The moral of the story is that a 401(k) is an investment that will span the course of your career, so making changes based on periods of market volatility isn't a sound long-term strategy. The 401(k) is considered to be one of the most tax-efficient ways for many people to save for retirement, so maintaining it over time - rather than reacting to the latest headlines - can help you stay on track toward achieving your savings goals.

*Schwab Retirement Plan Services, Inc. in conjunction with Koski Research, 401(k) Participant Survey, 2014.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

©2015 Schwab Retirement Plan Services, Inc. All rights reserved. 0215-0981

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