Don’t push panic button on your 401(k)

A 401(k) is the largest investment account for most people, and the drop in stock prices since Jan. 1 has many nervous about their investments.

We all work hard for our money, so that’s natural. But be careful: by selling off stocks now and moving into cash, you could be positioning yourself to lose money, permanently. Remember that people willing to be patient during short-term dips or market corrections can achieve favorable long-term returns.

Stock market volatility is likely for the foreseeable future. China posted its slowest growth in a quarter century in 2015, it doesn’t appear that the rock bottom prices for oil will skyrocket soon and the Federal Reserve may hike interest rates throughout the year.

So if you don’t already have a financial advisor guiding you on what is best for your particular situation, how do you manage your money in this environment?

To achieve maximum long-term returns, here are several strategies to consider:

• Review your investments and rebalance your portfolio. For example, if the current balance in your account is $100,000 and you aim for 75 percent in stocks, the market correction may have reduced stocks to 67 percent of your portfolio. Remember, you want to buy low and sell high. By rebalancing and bringing stocks back up to 75 percent, you will be able to buy more stocks at temporarily depressed prices.

• Review the percentage earmarked for future contributions and make certain enough money is going into stocks. The percentage for stock investments will depend on various factors, such as your time frame for retirement, but keep in mind stocks have a good chance to grow over time.

• If you don’t have a financial advisor and your 401(k) plan offers a target retirement fund, select one that most closely matches your retirement time frame. The target retirement date funds have a team managing the investment strategy inside the fund, so it’s more geared for investors who want to “set it and forget it.”

• Do not place all of your contributions in cash. If watching your investments decline causes you heartburn, it’s better to move some money from stocks and into bonds. If all or a vast majority of your 401(k) is invested in company stock, think carefully about this move. Your human capital is 100 percent tied to your company – should your investments be too? In addition, any company match may also be made in company stock. Many executives and senior-level managers also have a lot of stock options or restricted stock grants, making them even more tied to the fortunes of their company.

• For anyone less than five years from retirement, consider having at least 20-40 percent of your 401(k) portfolio in bonds. The percentage depends on the overall mix in your other investment accounts, how soon you plan to draw down on this 401k account and your risk tolerance.

• For people not planning to retire for 10 years or more, you may want more in stocks, which can provide long-term growth and outpace inflation.

• Consider increasing the percentage of pay going to 401(k) contributions, especially if you are not already contributing the maximum amount. The maximum is $18,000 for those under 50 and $24,000 for those 50 and older.

• Finally, if you are unsure about your personal strategy or don’t have the time or knowledge to properly invest your own nest egg, seek the help of a professional.

As you review your 401(k) contributions throughout the year, remember that you need growth over the long haul to generate strong returns. There will always be bumpy periods for the stock market, but maintaining a strategy for your contributions that meets your long-term financial goals should allow you to overcome occasional market drops.

Lisa Brown is a partner and wealth advisor at Brightworth, a financial planning and wealth management firm based in Atlanta with more than $1.2 billion in assets under management.

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