Here’s one good reason to check your 401(k) after stocks tank

These days, it might be better to check your portfolio on the desktop rather than the app — so you’re sitting down.

Now that the S&P 500 has fallen into bear market territory this week, there’s a good argument to stay logged out of your 401(k) — or even losing your password — so you don’t make money moves out of fear and instead stick with your long-term strategy.

“If we look at it rationally, and we zoom out, we see that there are always these periods where markets go up, they go down, inflation goes up and it goes down,” Lindsay Bryan-Podvin, a financial therapist, recently told. “And what we know is that, over time, if we hold on to our stocks, the market tends to recover, and things will be OK.”

Still, there is one great reason to check your 401(k) even if it’s in pieces due to the market selloff: asset allocation.

While many 401(k)s are set-it-and-forget-it affairs — thanks to target-date funds that are essentially 100% automated — many people use other 401(k) strategies and choose their own assets to make up their desired mix of stocks and bonds.

But when stocks get crushed, a person who wants to have 70% stocks and 30% bonds in their mix might find that the dials have been turned by the nosedive.

Here’s an example.

Let’s say a person has $100,000 saved, and $70,000 is in the S&P 500 and the rest is in bonds and cash. The index crashes 18%. Suddenly there’s only $57,400 in stocks. Now, we’re at 66% stocks.

Corrections and bear markets affect every portfolio differently, and not everyone may feel the need to track their desired allocations. However, having an awareness of the mix is often helpful.

“One of the things that we like to do in these periods of dislocation is rebalance,” Great Hill Capital Chairman Thomas Hayes toldon March 23, 2020 at the bottom of the original coronavirus crash. “You may want to check in with your financial adviser and say, ‘does this make sense to rebalance some of the portfolio?’”

Rebalancing to keep the allocations at the desired levels

As people age and retire, they have a shorter time horizon and prioritize safer investments like bonds even though they have less long-term potential for growth. This is the reason why target-date funds operate how they do.

Around retirement age the numbers are often 55% stocks and 45% bonds — but it’s unique to every situation.

In the past few years since the pandemic began, there have been a few times when it made sense to potentially rebalance as the run back up to all-time highs (and now the dive back down) hasn’t been smooth. Financial advisors often make a habit of checking in at these times.

“If you have a five- or 10- or 15-year horizon, this is probably a blip in the road,” Hayes said of the coronavirus crash, which indeed gained its losses and flew back to an all-time-high. “You probably want to hang tight. If you’re adding every single month, that’s a good thing — you’re buying less expensively for the long term.”