Four Steps to Protect Your 401(k)

For many American workers, just thinking about the damage done to their retirement accounts can be a little painful.  So what can you do to stem the flow of any more money out of your 401(k) or other similar plans?  Here are four ways that might help ease your pain.

Patience is a Virtue

First off, let's start with what you shouldn't do.  Don't stop contributing to your retirement plan or cash it out entirely.  Remember that you are in this for the long run, in most cases you won't need all your savings immediately and your investments should have time to rebound.  If you stop contributing to your plan you will miss out on the wonderful world of compounding income.  In addition, you could also miss out on free money if your employer matches your contributions.

Study Your History

Markets can go up and down, but history has shown that in the long term they go up.  After each big drop througout the years, stocks have rebounded and markets avhe reached new highs.  In addition, for long-term investors a severe bear market can be a good thing.  You can buy more stocks or funds at cheaper prices, and then reap the rewards when the market recovers.

Review Your Investment Plan

The reason you probably set up your 401(k) account was for buying and holding investments, and not for day-trading stocks.  However, it never hurts to review your plan based on your changing personal situation and risk tolerance.  A solid, long-term strategy that involves a well-diversified portfolio should protect your 401(k) or other retirement accounts during rough times (depending upon your risk tolerance and asset allocation).  Also, don't forget to assess your risk tolerance.  Figure out hom much you need to save for retirement and calculate how much to set aside each month to reach your goals.  If you're young, your 401(k) portfolio should hold almost entirely stock funds.  While stocks carry greater risks they also provide greater returns than bonds and money market funds.  Be sure you diversify through funds though funds of large, small, domestic and international companies, as well as growth and value stocks.  In addition, use fixed income securities to reduce your portfolio's volatility.

Avoid the Big Mistake

Working for a company does not mean the stock is a safer investment because you feel like you "know" the company.  A September 2008 article in the Wall Street Journal noted that employees of Merrill Lynch, Morgan Stanley and Lehman Brothers had lost significant amounts of their retirement holdings because of they had substantial amounts invested in their company's stock.  If you haven't done so already, think twice before you load up on your company's stock, no matter how comfortable you are with your employer's current financial situation.