Worried About Your 401k in Today’s Economy? Keep Calm and Keep Participating.

The nation’s economy has been on a roller coaster ride since January, and many Americans with 401(k) retirement plans are wondering how to protect their savings. Whether you’re nearing retirement or just beginning your investment journey, navigating economic uncertainty during a period like this can be intimidating. The upheaval we’ve witnessed lately, from trade wars to tax reform, from deregulation to privatization, features the kind of rhetoric that spooks Wall Street and has historically led to slumps and surges in the financial markets. At the end of the day, however, one question remains: what should 401(k) holders do now?

Cambridge’s specialty is credit counseling. We don’t provide retirement or investment counseling, so please bear that in mind as you read on. Unfortunately, however, because we’re hearing more and more of you express your worries about your retirement accounts, we feel obligated to respond. Here then, are our suggestions for managing your 401(k) in today’s turbulent economy:

Reassess Your Risk Tolerance

During periods of economic uncertainty, your personal tolerance for risk should guide the decisions you make about the investments within your 401k. Risk tolerance is essentially your comfort level with experiencing losses within your portfolio. If a market downturn similar to the COVID-19 crash in early 2020 would cause you to panic-sell, you may be overexposed to stocks.

Use this time to reevaluate your risk profile. Younger investors can typically afford to ride out downturns and may even benefit from buying when stock prices are low (Warren Buffett did pretty well with that approach.) However, if they haven’t already done so, people nearing retirement age may want to consider shifting into more conservative investments. This doesn't necessarily mean pulling out of the market altogether – not at all, it means adjusting the balance between stocks, bonds, and other assets within your portfolio to reflect your personal retirement timeline and emotional comfort.

Diversify, Diversify, Diversify

As we’re discovering right now, a tariff war can impact some sectors more than others. For example, the freight and agricultural sectors have already been hit hard, while manufacturers who don’t use parts from overseas sources may be unaffected. This kind of sector-specific volatility illustrates the importance of diversification.

If your 401(k) is heavily weighted toward one type of industry, consider rebalancing it. Many target funds will automatically reduce the overall risk of your portfolio, but even then, it’s wise to review your allocations and ensure they match your needs.

Don't Panic-Sell

Although the first quarter of 2025 has seen some remarkable losses, the most damaging reaction to a market dip is panic-selling. History shows that markets recover. If you sell during a downturn, you lock in your losses and miss out on the eventual recovery. It’s crucial to stay the course and remember that 401(k) plans are long-term investment vehicles. If you’re decades away from retirement, market downturns may actually represent buying opportunities. If you’re closer to retirement, having a portion of your portfolio in more stable investments will reduce the temptation to sell during a downturn, even one as significant as we’ve seen over the past few months. This would be the time to talk to your plan’s manager to discuss your options.

Keep an Eye on Inflation and Interest Rates

At its most recent meeting, the Federal Reserve declined to reduce interest rates, which is its primary tool to combat inflation. If that trend continues, your 401(k) could be affected in multiple ways. Rising interest rates typically help your savings account and CD rates, but they generally hurt long-term bonds and certain growth stocks. Consider adjusting the bond holdings in your plan or look into Treasury Inflation-Protected Securities (TIPS) if inflation is rising. Keeping some exposure to assets that perform well during periods of rising inflation can also serve as a hedge.

Stay Informed, Not Reactionary

Political noise can distract from long-term planning. The first quarter of 2025 has seen almost unprecedented uncertainty, and it’s no secret that markets dislike uncertainty. However, overreacting to headlines is rarely a sound investment strategy. Stay informed through reputable sources and keep your focus on long-term economic trends, rather than panicking over day-to-day market swings.

If your employer offers financial counseling or planning services as part of your 401(k) plan, take advantage of them. Regular check-ins with a financial advisor can ensure your portfolio stays aligned with your goals, even in a shifting economic landscape.