Economic downturns are an inevitable part of financial cycles, and when markets dip, even well-diversified portfolios—including your 401(k) —can take a hit. While recessions may be temporary, their impact on long-term retirement savings can raise serious questions. How will market volatility affect your portfolio? Should you adjust, or is it better to stay the course?
These concerns are valid, as you want to safeguard the wealth you’ve built. A poorly timed decision could lock in losses, while the right strategy can position your retirement savings for long-term growth.
So, should you adjust your 401(k) strategy during a market downturn, or is patience the best approach? This article will provide expert-backed insights into navigating recessions with confidence.
How Recessions Affect 401(k) Accounts
A recession is a period of economic decline marked by shrinking GDP, rising unemployment, and decreased consumer spending. Inflation concerns often accompany downturns, adding to uncertainty. Recessions also usually make stock markets more volatile, triggering 401(k) balance fluctuations.
While these swings can be unsettling, they are a natural part of the economic cycle, and financial markets. Historically, markets recover over time, but the uncertainty can drive emotional decision-making. As such, many investors panic and move assets into cash or low-risk investments—potentially missing out on long-term gains when the market rebounds.
Historically, these cycles show that downturns don’t last forever and patience often yields better results than reactive, emotional, decisions. While you can’t control market conditions, you can take strategic steps to mitigate risks and strengthen your portfolio.
You can help safeguard your retirement savings without costly missteps by making informed adjustments and maintaining a long-term perspective.
Should You Adjust Your 401(k) Contributions During a Recession?
You might wonder what to do with your 401(k) during a recession—should you maintain, increase, or decrease your contributions? Continuing to invest during a downturn allows you to “buy low,” acquiring more shares at discounted prices—giving you a significant upside when markets recover.
However, adjusting contributions may be necessary if you’re facing job uncertainty or cash flow concerns. In such cases, temporarily reducing contributions could help maintain financial stability. If your income remains secure, increasing contributions can position you for greater long-term gains. Consider which of the last 10 downturns in the market have not been profitable to buy during a downturn? None!
Before making significant changes, it’s wise to consult a financial advisor. A professional can help assess your situation, balance short-term needs with long-term goals, and ensure you don’t make emotionally driven decisions.
Stay strategic—make adjustments based on financial planning, not market panic or “feelings.”. With the right approach, your 401(k) can remain a powerful wealth-building tool, even in uncertain times.
Smart Strategies for Protecting Your 401(k) During Recessions
The right strategy can help safeguard your 401(k) amid market downturns without derailing your long-term goals. Rather than making erratic decisions, plan on leaning on your investment philosophy to navigate recessions effectively.
Implementing the following strategies protects your 401(k) during recessions while positioning yourself for long-term growth.
Stay invested for the long haul
Resisting the urge to pull out of the market is crucial. Selling assets during a downturn turns unrealized losses into realized losses. Staying invested allows you to participate in eventual market recoveries.
Generally, markets tend to rebound after recessions, often reaching new highs. For example, investors who stayed the course during the 2008 financial crisis saw substantial gains in the following decade.
Diversify your portfolio
A well-diversified 401(k) can help reduce risk during economic turbulence. Spreading investments across asset classes—stocks, bonds, and alternative investments—can create a buffer against volatility. For instance, while equities may decline during a recession, bonds often provide stability, helping to balance overall returns. Another example of this, is to look at which country is leading in performance, during any given year. Even if you are reading this article in 2, or 7 years, it’s unlikely that the same country that had the highest level of performance this year, will have the highest level of performance next year! What’s the point…the point is that many people consider investing in the U.S. yet have very little information about which countries are advantageous to invest in. By getting better information about where performance can be generated, we would suggest it makes a compelling case for investing outside of the U.S. – not exclusively in the U.S. (Certainly we are advocating for investing in the U.S. – just not exclusively U.S.).
Rebalance regularly
Market swings can shift your asset allocation over time. If stocks decline significantly, your portfolio may become overweight in bonds or equities. Rebalancing—adjusting your asset mix to maintain your original investment strategy—ensures you stay aligned with your risk tolerance and retirement goals.
Talk to a professional financial planner
Even experienced investors benefit from expert guidance. A financial planner can help assess your portfolio, identify opportunities, manage behavior and biases and adjust your strategy without making fear-driven mistakes. They can also personalize a plan to align with your financial objectives, risk tolerance, and time horizon.
Don’t Let a Recession Rattle Your Retirement
Recessions may shake the markets, but a disciplined approach can keep your 401(k) on track. Staying invested prevents costly mistakes, diversification cushions against volatility, and regular rebalancing ensures your portfolio remains aligned with your goals. Last but not least, professional guidance and a strong strategy are vital in overcoming uncertainty.
If you want personalized guidance to protect your retirement savings, Tencap’s financial planning services can help you manage behavior, understand and adhere to investment philosophy and be properly diversified so one country or sector lagging, does not have a drastic pull on your investments.
Curious about the value of expert advice from a team with decades of experience? Check out 7 Reasons Why Our Advisory Services Are Worth the Fee and see how Tencap’s strategic financial planning can enhance your long-term wealth. Start planning for a resilient economic future with a Certified Financial Advisor® in Utah.
Disclaimer: The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Utah or where otherwise legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Purchases are subject to suitability. This requires a review of an investor’s objective, risk tolerance, and time horizons. Investing always involves risk and possible loss of capital.
Nick Carrigan
Nick trains and develops families in creating, maintaining, and growing wealth. This includes educating clients on the science and academics of investing, comprehensive financial planning, and ongoing coaching to ensure discipline for a lifetime. Nick has seen this create incredible levels of freedom, fulfillment, and love for the families he works with.
