How To Protect Your 401k During Periods Of Market Volatility

Home » Blog » How To Protect Your 401k During Periods Of Market Volatility

Disclosure: Our content does not constitute financial advice. Speak to your financial advisor. We may earn money from companies reviewed.  Learn more

The recent volatility in the bond market has many questioning whether this is signaling a pending recession. That said, what does this volatility mean for a 401k? In this article, 7 experts weigh in on how to protect your 401k during periods of market volatility.

Short Term Fixed Annuity Or Fixed Index Annuity During Market Volatility

“In times of market volatility, a short term fixed annuity or fixed index annuity between 2 to 5 years in length might be a good option.  You can protect your funds for a short period of time, make an average return, then move your funds back into the market when conditions are positive.

With most fixed and index annuities, an owner can leave their funds in their annuity even after the contract is completed, and be 100% liquid.  When the market improves, move a portion or all of the funds back into the market.


Purchase a $100,000 fixed index annuity with a 3-year contract.  The $100,000 grows to $120,000 over the 3 years. After 3 years is complete, all $120,000 is liquid.  You can either move the funds back into the market or just wait until the conditions improve down the road.  Either way, the funds are protected from market volatility, there's an opportunity to make an average rate of return, and your funds are 100% liquid.

With Return of Premium annuities, I basically can get my original funds back at any time without penalty.  I won't pocket any returns, but my money is protected and 100% liquid.

Annuities with accumulating penalty-free withdrawals might be the best worlds.  Accumulating penalty-free withdrawals are like old school cell phone plans where unused minutes “rollover” to the next month.  This is a similar concept to accumulating penalty-free withdrawals.  The penalty-free withdrawals rollover each year providing more liquidity.

In times of market volatility, one can purchase one of these annuities, allow the penalty-free withdrawals to accumulate over time.  When the market conditions improve, you can move large chunks of your account plus earnings back into the market step by step.”

Shawn Plummer, Director of Advanced Annuity Sales, The Annuity Expert 

US Government Bond, Cash, Utility, And Precious Metal Funds

“The saying goes, “The only thing certain in life is death and taxes.” This saying should be amended to include bear markets. A “bear market” is generally defined as any period in which the stock market, as measured by the S&P 500 Index, has fallen at least 20%. Bear markets typically occur every 8 to 10 years, with the most recent occurring in 2008. The average pain felt during these downturns since 1929 has been a 43% loss.

Diversification is often touted as a means to protect assets during market volatility. Target-date retirement funds, which have grown to over $1.8 trillion in assets, have been overwhelmingly sold on the benefits of diversification recommending investors pick one fund and “set-it and forget-it”. These funds often fall well short of expectations during protracted market downturns. When U.S. stock markets fall, foreign stock markets and other asset classes often become increasingly correlated and follow suit. During the financial crisis, from the market high in October of 2007 to the market bottom in March of 2009, the S&P 500 fell over 50%, while international stocks fell just over 55%.

While bear markets only last about 20 months on average, and major stock markets recover and generally rise, these periods of market volatility can impact a lifetime of saving for retirement. Employees will typically encounter 3-4 bear markets during their career, and if the last occurs as they near retirement, the poor timing may not leave enough time for them to recover a large portion of their nest egg.

Investors don’t have to leave their retirement fate up to market cycles. Most 401k plans offer US government bond, cash, utility, and precious metal funds, which frequently outperform when major stock indices fall. During the financial crisis of 2008, intermediate-term US Treasury bonds (IEI – iShares 3-7 year treasury bonds) actually increased in value over 11% while gold rose by over 25% (GLD – SPDR gold trust).

As we near the end of this current economic expansion, now the longest in history, it would be prudent for all investors in all stages of saving to consider decreasing allocations to stocks and increasing allocations to US government bonds, utility stocks, cash, and precious metals.

Finally, it is perhaps most important for savers to practice a patient, disciplined approach when the market hits turbulent times. While a short recession and a bear market may feel like the end of the world at times, many retirement savers are still many years removed from needing the majority of their savings for income. Decisions based on fear (as with greed in good times) rarely generate the optimal results.”

Kyle P. Webber, Principal and Managing Partner, Quartz Partners Investment Management

Precious Metal Content In The 401k Portfolio

“In the first instance, 401Ks are not ideally suited to precious metal investments, functioning under severe restrictions that limit the platform to paper assets – not physical possession. There are exceptions and different ways to diversify into gold, silver, or platinum, but I want to focus on the sense of going in that direction – not the obstacles. 401k, as an investing strategy, centers itself on regular investing. It's a core methodology in connecting to the benefits of average costing (AC). AC relies on long term uninterrupted installments into even volatile investments. The logic is that the volatility is flattened somewhat by the system of investing multiple times in up, down, and sideways conditions. In my view, nothing can compete with AC as a strategy and relying on time as a catalyst for smooth sailing.

So the question is, in a 401k that adheres to regular investment rules, should some of that go into precious metals? I mean, after all, precious metals are not immune to volatility – albeit with different timing and following alternative changes in the economy. Right now, with one of the longest bull markets ever, and indeed with no end in sight, it's hard to make a case to move away from traditional equities. However, a recession will eventually come through, and inevitably, there will be a downturn. At that point, sometime in the future, you will be thankful for the precious metal content in the 401k portfolio. So, yes, it's a wise diversification in principle.

Your next question is, why? Answer: Because it's an asset class that behaves counter-cyclically to stocks- broadly speaking. In short, when the latter misbehave precious metals trend positively as a rule. Historically, gold and silver are proven hedges against inflation, currency devaluation, and falling equity values. They also categorically have no counter-party obligations attached (i.e.,
they can't go bankrupt like any corporation can). When there's an economic downturn, it frequently ushers in an ill-wind carrying most if not all the maladies cited above. If the precious metal content functions, as it should, it will be a strong pillar in troubled times, even if a bit muted when stocks are going gangbusters.”

Gordon Polovin, Finance Expert, serves on the advisory board for Wealthy Living Today

An Emergency Fund And Reevaluate Your Risk Tolerance

An emergency fund is essentially a safety net for your financial wellbeing. No matter the state of your finances, an emergency fund is always a good idea. In the event of a recession or economic downturn, this fund can serve as a buffer for your 401K, which you should avoid dipping into at all costs

A good rule of thumb is to put away at least a year’s worth of expenses in the event that you need to sustain yourself or your family. Set up automatic transfers to this dedicated savings account so that you don’t have to manually transfer the money yourself, this way you won’t see the money and you won’t even miss it.

Reevaluate your risk tolerance when it comes to your investment portfolio. You should always be revisiting your ratios of stocks to bonds as the market fluctuates, creating a more aggressive, passive, or balanced

Nathan Wade, Managing Editor, WealthFit Money

Dollar-Cost Averaging (DCA) And Regular Portfolio Rebalancing

“How do you protect your 401(k) during periods of market volatility?  The same way you should protect it any time in any market conditions.

Saving through a qualified retirement plan is a long-term endeavor. Over the years, there will be many periods of volatility; and while there will be indicators, no one is capable is timing their actions with sufficient accuracy to avoid an eventual wrong move. Therefore, one's nest egg should first be allocated according to one's risk tolerance, with absolutely no consideration of what the market might do when, as inevitably it will not happen as expected.

The way to protect one's nest egg is to have one's accounts set up in a manner to take advantage of market movement, whether that movement is up or down. The first method of doing this is through dollar-cost averaging (DCA). Using this philosophy, smaller amounts are systematically and consistently invested in increments over time, ensuring that too large a sum is not dumped at once into a particular investment. As an investment is rising in value, more funds are being placed into it. As the value is falling, more shares are purchased at lower prices, positioning the investor for greater gains once the investment turns around.

While the DCA philosophy has its critics, DCA has historically beaten every other long-term model, and with the lowest risk among similarly allocated portfolios; but that's beside the point, as most employer-sponsored retirement plans are funded in regular incremental amounts using payroll deduction. DCA occurs in this scenario whether or not it is intended.

The other method, employed concurrently with dollar-cost averaging, is regular portfolio rebalancing. Periodic and regular rebalancing (shifting funds within the allocation to maintain the original mix) results in an automatic buy/sell function where gains are sold off to buy into other investments at their lows. This, like dollar-cost averaging, sets one up for inevitable overall gains while minimizing market risk.

Bottom line:  A 401(k) funded through payroll deduction is the ideal situation. One must simply select a proper asset allocation, tweak it every few years as one gets closer to retirement, and set up regular rebalancing. There are no sophisticated investment models needed, as set it and forget it has proven itself the most beneficial philosophy.”

Rob Drury, Executive Director, Association of Christian Financial Advisors

Shift Funds, Cash, Buy More

“Shifts Funds to More Stable investment Assets

The first step to protect your 401K in volatility is to shift your money to more stable assets. Common stocks, bonds, and commodities (like oil) tend to swing dramatically when the market is in a period of uncertainty, which could cause dramatic and quick drops to your 401K. Instead, moving your money to assets like treasury bills will provide you with more stability. T-Bills offer very little in terms of interest. However, for what you give up in interest, you gain in protection.

Hold More in Cash

Another common strategy for market volatility is to move your money into cash. Cash has no interest return and, in fact, actually loses nominal value due to inflation. However, cash is a fantastic vehicle during market instability because you won’t lose a significant amount of money on a market downturn. Consider this move an insurance policy: you won't make money, but you won't lose money either.

Buy More

A final strategy for your 401K during market volatility is to turn the stock market swings into an opportunity. While this is much riskier, and probably a better strategy when you are young, Warren Buffett has long said that you should buy more when there is “blood in the streets.”

By buying during volatility, you could get stocks at an undervalued price.

When the market stabilizes and prices normalize, you could end up making a lot of money off that uncertainty”

Logan Allec, CPA and Owner of Personal Finance Site, Money Done Right

Establish An Investment Policy Statement

“There is really no way to effectively protect your 401k during periods of market volatility without surrendering long-term return. Investors should give up on trying to time the market. The old Wall Street adage “time in the market is more important than timing the market” should be a mantra for investors. However, what many individual investors do is that they attempt to time the market, only to find that they sell after a prolonged bear market and get back into the market after it has risen substantially. In essence, they “buy high and sell low.” Jack Bogle, the founder of the Vanguard Group of mutual funds, wrote of market timing: “After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know of anybody who knows anybody who has done it successfully and consistently.

JP Morgan Asset Management's 2019 Retirement Guide provides some data on the effect of market timing. Looking back over the 20-year period from Jan. 1, 1999, to Dec. 31, 2018, if you missed the top 10 best days in the stock market, your overall return was cut in half. Fully invested in the S&P 500 for that 20-year time period, the return was 5.62%. If you missed the ten best days the return was 2.01%. Miss the 20 best days and the return was negative.

The old Wall Street adage that “no one rings a bell at the top of the market” is very accurate. Investor’s hindsight bias makes it appear as if market tops are readily apparent. Nothing is further from the truth.

Long-term investors should establish an Investment Policy Statement and follow it. Investors should not concern themselves with broad market moves or the crisis de jour. An IPS is a written document that clearly sets out a client’s return objectives and risk tolerance over that client’s relevant time horizon, along with applicable constraints such as liquidity needs and tax circumstances. In essence, an IPS sets out the ground rules of the investment process – it is the document that guides the investment plan. Included in that IPS is a target asset allocation. The IPS should include a glide path for target asset allocation changes as the individual ages. All investors should have an IPS. And, it is best to develop an IPS in a rather calm market. Developing an IPS in a volatile market or during major stories is problematic. The whole point on an IPS is to guide you through changing market conditions. It should not be changed as a result of market fluctuations. It only needs to be revised when your individual circumstances change — perhaps a divorce or other unanticipated life change. Advisors should always bring clients back to their IPS.”

Robert R. Johnson, Professor of Finance, Creighton University, CFA, Chairman and CEO, Economic Index Associates

Many analysts are asserting that the recent volatility in the bond market is flashing warning signs of a pending recession. Although only time will tell what trajectory the economy is ultimately heading, factor in the expert advice provided here, and always do your due diligence to invest wisely.


Sarah Bauder
Sarah Bauder

Sarah Bauder has a decade of experience at numerous publications, writing about finance, politics, economy and more.

Articles: 114

Leave a Reply

Your email address will not be published. Required fields are marked *

FTC Disclosure: We are an independent blog that aims at providing useful information for retirement account owners interested in alternative assets like precious metals. However, our content does NOT constitute financial advice. Please speak to your financial advisor before making any investment decision. Also, the data quoted on this website represents past performance and does not guarantee future results.


Copyright © 2024 Gold IRA Guide