5 Reasons You Shouldn’t Touch Your 401(k) When the Stock Market Plunges

Ann Miller |

When the stock market takes a nosedive, it's natural to feel nervous—especially when you see your 401(k) balance shrink. But before you react out of fear and make changes to your retirement account, it’s crucial to take a step back and look at the bigger picture. Panic selling can lead to long-term regret, and history shows that staying the course often pays off.

Here are five key reasons why you shouldn’t touch your 401(k) when the stock market plunges:

  1. You Lock in Losses

    When markets drop, your investments may be worth less on paper, but you haven’t actually lost anything until you sell. If you move your money out of the market during a downturn, you turn those paper losses into real losses. Selling low is the opposite of what every investor aims to do: buy low and sell high.

  2. Market Drops Are Temporary—Recovery Is Historical

    Bear markets are unsettling, but they’re not permanent. The S&P 500 has recovered from every major downturn in history, from the Great Depression to the 2008 financial crisis to the COVID-19 crash in 2020. If you pull out during a low, you risk missing the rebound—and often the strongest gains come shortly after a market bottom.

  3. Timing the Market Rarely Works

    Even professional investors struggle to predict market highs and lows. If you move your money to the sidelines, you’ll face the impossible task of deciding when to get back in. Miss just a few of the best days in the market, and your long-term returns can take a serious hit. The better strategy? Stay invested and stick to your long-term plan.

  4. Your 401(k) Is Designed for the Long Haul

    Your 401(k) is a long-term investment tool, not a short-term savings account. The power of a 401(k) comes from compound growth over decades—not months. By staying invested and continuing to contribute regularly, you’re likely to come out ahead, even through periods of volatility.

  5. You Could Face Penalties and Taxes

    Taking money out of your 401(k) early doesn’t just hurt your future retirement—it can hurt you right now. Unless you qualify for a hardship withdrawal or meet specific criteria, pulling funds early typically comes with a 10% penalty plus income taxes. That’s money lost that could’ve kept working for you.

Stay the Course

Market volatility can shake your confidence, but reacting emotionally to short-term drops can derail your long-term success. Instead of making knee-jerk decisions, review your asset allocation and focus on your goals. Sometimes, the best move is no move at all.

Remember: Time in the market beats timing the market.

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