Q&A with a CPA: Should I Liquidate My 401k?
Q: Some stock market experts are predicting another bubble burst. How do I handle my 401k investments before another massive stock market crash?
A: The answer here has to do with dollar-cost averaging. According to Investopedia, “Dollar-cost averaging is the technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high.” When you have a percentage of your salary withheld from your paycheck and put into your 401k, you are engaging in dollar-cost averaging.
Over time, the average cost per share of the investment you’re buying will become smaller and smaller, regardless of whether the market goes up or down. This method of investing lessens the risk of loss because you’re not taking the chance of investing a large amount of money on a single date and having that end being the wrong date. It’s kind of like waiting to fill your gas tank up when gas prices are lowest, only to find that they may never drop or they spike on the day your tank hits empty. Timing the market rarely works out the way you want it to.
But how does this relate to a possible bubble burst or stock market crash? Because if you were to sell all of your 401k investments in an effort to capture the growth of the stock market and have your investments in cash if/when the next stock market crash happens, eventually you’ll have to get back into the market and it will most likely be all in one big chunk. So yes, you’d be potentially saving yourself from another big dip in the value of your 401k. But then how do you know which day is the perfect day to get back in? If you wait to make sure the market isn’t going to go down any further, you risk buying back in after the market’s already come back.
If you are approaching retirement age (like you’re within 5 years of your retirement date), you may actually consider taking a portion of your 401k investments out of the stock market and investing them in fixed income or even leaving some of it in cash. But for the rest of us Career Girls who have ten or more years to go, my advice is to simply keep up with the regular contributions to the account, maintain the proper allocation of your investments toward your goals, try not to watch the daily market fluctuations and keep your eyes on the long-term goal of growth – the market has recovered from every single crash in history, including the last one, which led us to where we are today with record stock market values. Ride the storm out and simply take advantage of any dips in the market to buy more shares.
DISCLAIMER: This post is not meant to dispense investment advice and is provided for informational purposes only. The opinions expressed are those of the author and are not necessarily those of Career Girl Network or the author’s employer. Please consult your investment adviser for specific investment advice relating to your personal goals and situation.