Question

How to invest 401k during recession?

Answer 1

According to a recent survey by the National Association for Business Economics, seven out of 10 economists expect a recession by the end of 2021.

Even the savviest investors worry about not having enough cash on hand to cover basic expenses during a recession — let alone those who have their entire nest egg wrapped up in a volatile market. That reasonable anxiety can prompt 401(k) participants to decrease their contributions or even cash out on their retirement savings entirely.

However, the long-term harm that a panicky move may have on their ability to retire outweighs any short-term benefits.

An economic downturn may tempt investors to put even less into retirement savings while waiting for a bull market to return. On the surface, it seems like this strategy protects savings. During the last recession, personal savings as a percentage of disposal income fell from 6.4% to 3.7% between December 2008 and January 2009. With concerns about another recession growing, many investors might consider cashing out on savings in an attempt to avoid similar losses. However, because it is almost impossible to time the market, this approach is likely to backfire, further delaying their ability to save and pushing the retirement date back. Staying steady and continuing contributions during a recession is necessary to grow savings and have a solid financial footing in retirement, even just by maintaining an employer match.

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