Stock market downturns can be nerve-wracking, especially when your retirement savings are on the line. On December 18, the S&P 500 fell nearly 3%, and the Dow dropped over 1,100 points, sparking widespread panic. The trigger? The Federal Reserve announced that it would cut interest rates fewer times in 2025 than initially expected. While such news can feel alarming, 401(k) holders must resist the urge to make impulsive decisions. Selling stocks or withdrawing funds prematurely during a market slump can have long-term consequences. Here’s why staying the course is often the best strategy.
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The Psychology of Market Panic
It’s human nature to react emotionally to financial turbulence. When the market dips, headlines amplify the fear, and seeing your net worth decline in real-time can be terrifying. Dan Egan, director of behavioral finance at Betterment, explains that negative news tends to dominate because people are wired to focus on potential threats. “If the market goes up, it doesn’t get as much fanfare,” he says. This bias can lead to poor financial decisions, such as selling investments at a loss or raiding retirement accounts.
Behavioral economics, a field dedicated to understanding financial decision-making, highlights how biases and emotions often override rationality. For example, during market downturns, some investors panic-sell, while others chase the latest “hot” stock. Both approaches can backfire. Experts emphasize that long-term investors should focus on their goals decades down the road, not daily market fluctuations. Historically, the stock market has returned an average of 10% annually, despite short-term volatility.
Research by CFRA’s chief investment strategist, Sam Stovall, underscores this point. Analyzing market pullbacks and corrections since World War II, Stovall found that the market typically recovers from a 5-9.9% decline in about a month and a half, and a 10-19.9% correction in less than four months. The lesson? Knee-jerk reactions to market plunges can derail your financial future.
Sam Stovall, Chief Investment Strategist at CFRA Research Joins NYSE TV Live
Five reasons to avoid raiding your 401(k)
1. Diversification protects you
If your 401(k) is entirely invested in stocks, market volatility can feel overwhelming. However, a well-diversified portfolio—including bonds, cash, and certificates of deposit—can provide stability. Rob Williams of the Schwab Center for Financial Research advises, “Have some stable things in your portfolio… That knowledge will keep you from [making] any extreme reactions.” Diversification acts as a cushion, reducing the temptation to panic-sell.
2. Your income stream may remain unaffected
For income-oriented investors, dividend-paying stocks can provide consistent cash flow, even during market slumps. Stovall notes, “Unless companies cut their dividend, your income stream will be unchanged.” This means you can continue to benefit from regular payouts, regardless of short-term market movements.
3. Market downturns can be buying opportunities
While market plunges are unsettling for shareholders, they can present opportunities for buyers. Dan Egan suggests that short-term blips are a chance to “get stuff on sale.” Instead of withdrawing from your 401(k), consider investing in undervalued stocks. Taking advantage of others’ panic can pay off in the long run.
4. Seek a second opinion before making big decisions
If you’re tempted to make drastic moves, consult a trusted advisor, friend, or family member. Stovall recommends running your plans by someone who can provide perspective: “That person might push back: ‘Is this something you want to be doing?’” A written financial plan can also serve as a guide, helping you stay on track during turbulent times.
5. Don’t let financial news dictate your actions
The constant stream of financial news can amplify anxiety, especially for retirees with more time to monitor their portfolios. Williams cautions against overexposure: “Short-term news creates a lot of anxiety… and if you allow it to drive your investment decisions, it can lead to adverse outcomes.” Instead of checking your 401(k) balance daily, review it quarterly or semiannually to avoid rash decisions.
The bottom line
Market fluctuations are inevitable, but selling during a downturn locks in losses and jeopardizes your long-term financial goals. As Stovall puts it, “If you don’t sell, you don’t lose.” By staying calm, maintaining a diversified portfolio, and focusing on your long-term strategy, you can navigate market slumps without derailing your retirement plans. Remember, the stock market has historically rewarded patience and discipline—so resist the urge to panic and stay the course.
