Curiosity killed the cat: Here are the 3 worst times to check your 401(k) balance
Ever heard the saying, “a watched pot never boils”? The same can be said for your retirement savings: Watched investments never seem to grow. Anyone with a 401(k) account, particularly younger investors, can probably relate to the slow burn of their portfolio. The returns, dividends and compounding interest — can’t grow fast enough.
The truth is, your 401(k) is a long-term investment designed to grow steadily over time, but wild swings — especially huge up days — often invite frequent check-ins to see how much closer that day’s action brought you to retirement.
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Advisers say constantly checking your balance can lead to impulsive decisions that jeopardize your financial future. We’ve compiled three of the worst times to check your account balance and explained why it’s dangerous.
During market volatility
Market volatility is inevitable. Stocks rise and fall, influenced by economic events, political changes or unexpected global crises. Anxiety is natural, but checking your 401(k) balance during downturns can be particularly harmful.
When you see a significant drop in your 401(k), you may be tempted to move your investments to safer options such as bonds or cash. Driven by fear, this reaction can lock in losses and prevent your portfolio from recovering during a rebound. Historically, the stock market has always bounced back from downturns, and those who stay the course are often rewarded with substantial gains over the long term. Precipitous drops become, in effect, buying opportunities for patient investors.
Instead of constantly monitoring your balance, focus on your long-term investment strategy. Ensure your portfolio is diversified and aligned with your risk tolerance. Trust in the power of time and compound interest to grow your savings.
Following major news events
Economic reports, elections or geopolitical tensions have dynamic effects on the markets and can cause sudden spikes or drops in your 401(k) balance. This can lead to emotional and perilous investment decisions.
For example, if you sell off stocks after a negative news report, you might miss out on a subsequent market recovery. Similarly, buying after a positive news event might mean purchasing at a peak, leading to losses when the market corrects itself. It’s OK to regularly review your portfolio’s performance and make adjustments based on your overall financial plan — just don’t base it on daily news cycles.
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During personal financial stress
Uncertainty from unexpected medical bills, a job loss or significant life changes can prompt you to check your 401(k) balance for a potential source of funds. Beware of the quick fix: Pulling money from your retirement savings should be a last resort.
Withdrawing funds from your 401(k) before you retire can result in costly penalties and taxes, significantly reducing your nest egg. There’s also an opportunity cost. With less money in your 401(k), your potential for compounding growth declines. Compounding is critical to building a large retirement nest egg.
To avoid early withdrawals, consider establishing an emergency fund with three to six months’ worth of living expenses. If you must access your 401(k), consider taking a loan against it rather than an outright withdrawal, but be mindful of the repayment terms and potential impact on your retirement goals.
Staying the course
Understanding the dangers of checking your retirement account balances can help you stay on the path to long-term financial success. Here are a few additional strategies to keep you on track:
Set it and forget it: Automate your contributions and resist the urge to make frequent changes. Regular contributions and compound interest will help your savings grow over time.
Review your portfolio annually: Schedule an annual review of your 401(k) with a financial adviser to assess its performance and make necessary adjustments based on your long-term goals.
Stay informed but detached: Stay on top of market trends while insulating yourself from day-to-day fluctuations. This will position you to make more informed decisions without being swayed by short-term market movements.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.