Taking the Anxiety out of 401(k) Investing

Tips for a calmer approach

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Scott Holsopple

A watched 401(k) never boils.

You’ve probably heard someone say that “a watched pot never boils.” Of course a pot of water sitting on a hot stove will eventually boil, but watching it won’t make it boil more quickly. Likewise, obsessing over the market and your 401(k) investment balance on a daily basis won’t help you reach your retirement goals more quickly.

Maybe that seems absurd. After all, keeping up with your retirement account and market news is good. It means you’re an engaged investor, and it could help you to make appropriate long-term investing decisions.

Problems arise when retirement investors who track the market and economic events also check their retirement accounts a little too often. Some investors feel the urge to take action every time they see a drop in account value or anticipate a dip in the market. They try to time the market and day-trade their way toward retirement.

Financial news is too concentrated on today’s events. Newspapers, websites, radio, and television are all guilty. They adopt a panicked tone after a DJIA dip and rejoice after a positive day. It’s unusual to hear or read about the big picture—how the “breaking news” will affect the next several quarters or years. And since some financial pundits and reporters behave like they’re investment advisers, it’s easy to forget that they’re not taking on any fiduciary duties when they tell you to buy this, sell that, hold this, and buy more of that.

The long-term outlook is more important than immediate results because 401(k) investing is a long-term activity. It calls for saving and steady investing with an appropriate strategy.

Moving in and out of the market is difficult for the most seasoned professional investors. It’s very risky and could lead to significant losses for your nest egg. Since many Americans rely on 401(k) investments to provide a large portion of their retirement income, overly risky retirement investing just isn’t appropriate.

To avoid this, (1) allow yourself to check your 401(k) balance monthly or quarterly, (2) follow economic news but avoid panicking about the daily movements of the market, and (3) create a long-term investing strategy.

With a long-term strategy, a newsaholic can stay sane because there’s a plan in place. Here are four elements to include in your strategy:

(1) Dollar-cost averaging is a concept that’s put many a jittery mind at ease. The idea is that you continue to invest the same amount of money every week or every month regardless of market conditions. You stay in the game. You’ll take some hits during down cycles, but you’ll be at the party during up cycles. Over time, history shows fairly steady long-term gains for investors who use dollar-cost averaging as part of a good investing strategy. However, dollar-cost averaging loses its power if you make frequent moves between aggressive and conservative investments.

(2) A personalized asset class allocation will cater to your risk tolerance and timeline to retirement, with consideration for big-picture market conditions.

(3) A well-researched fund lineup means you’ve looked into the funds you’ll use to fulfill your asset class allocation. At the very least, a fund should invest according to its stated goals, have a manager with a long track record, perform well relative to peers, and have a relatively steady history without extreme volatility.

(4) A plan for saving and investing should spell out when you’ll increase your contributions and how you’ll change your investments as you near retirement age.

Now relax. Read about retirement planning and keep up with economic news, but don’t panic. You have a strategy, and you’re not afraid to use it.

Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.