How To Protect Your 401k From a Stock Market Crash

The total protection of your money from a market crash is difficult. However, you can minimize risks and protect most of your investments with a few precautions.

Thus, keeping most of the assets in your 401K safe in a bear market is possible. However, you must be careful not to sacrifice your portfolio’s ability to grow to avoid risks.

To protect your 401k from a market crash, you can liquidate your assets, use dollar-cost averaging, or diversify and rebalance your portfolio.

Instead, you need to balance security and growth. Fortunately, achieving such a balance is easier than most people realize.

There are many strategies to protect your 401k or IRA. Here are 13 options to choose from.

1. Move To Cash & Bonds

The simple truth is that when there is a real stock market crash, most, if not all, stocks fall. So, diversification in safe stocks will not help you. Moving your portfolio to cash or government bonds is the best course of action. This means total protection from falling stocks.

Move to Cash in a Crash

Generally, stocks fall in value twice as quickly as they gain value.  The best price gains are longer-term uptrends over multiple years.  Crashes happen quickly and violently due to the panic and fear in the market.  However, a real crash can be devastating to your wealth, luckily they are fairly infrequent.

The three worst crashes of all time were the great depression of 1929, the worst year being 1931 with a 47% drop, followed by 1937 with a 39% drop.  The next worse was in 2008 with a 38% drop in one year.

 

However, there is one problem with moving to cash: the timing.

If you move to cash too early and the market recovers quickly, you may miss out on stock market gains.

Move too late, and you will have lost too much money; in this case, you should employ a dollar-cost averaging strategy.

Our Stock Market Crash Detector System covers the problem of timing your cash move.

[Related Article: Avoid The Crash Move To Cash]

2. Use Dollar-Cost Averaging

Dollar-cost Averaging In Stocks is a Great Way for Long-term Investors to Maximize Profits & Lower Risk. Analysis of Bull, Bear & Sideways Markets. Learn the advantages and disadvantages.

Dollar-cost Averaging is a method of investing in which an investor invests a fixed amount regularly (e.g., monthly) in a long-term investment. When the price of the investment goes down, the investor receives more shares for their money, and when it increases, they get less. This averages down the cost per share, promoting a successful outcome.

Related Article: Dollar Cost Averaging In Stocks [8 Top Investing Strategies]

3. Understand How Your Portfolio is Impacted

The key to understanding how your stock portfolio may be impacted is to use the right tools to analyze your current holdings and enable you to perform the proper research to enable your investing strategy.

For example, if your current portfolio is already very defensive and correlates poorly with the current market direction, you may not need aggressive action.

Portfolio analytics and stock research are the keys to long-term successful investing. You need a tool that can provide:

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4. Diversify to Protect your 401K from a Market Crash

There is no foolproof strategy that will keep your portfolio safe. However, you can mitigate your risks with basic moves like diversification.

The first strategy for protecting your nest egg is diversification. To explain, put your money in several places to avoid losing everything.

For instance, invest in different stocks and US Treasury Bonds. Basic diversification strategies include investing in 20% tech stocks, 20% finance stocks, and 20% energy stocks.

In addition, invest in several good dividend stocks to have money coming in. A great rule is to have at least 50% of your 401K funds in dividend stocks.

Finally, having part of your funds outside of stocks will keep part of your money from a crash. Having 20% of your funds in CDs or Bonds can ensure you will have cash.

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5. Choose Dividend Stocks

The most important protection from any market correction is a steady cash stream. Even a small but regular cash payment can protect you.

Thus, you need to keep part of your 401K in a CD, treasuries, or other investment that pays cash interest. You can also augment that income with dividend stocks.

The smartest strategy is to reinvest that cash in your 401 (K) to grow the portfolio. Hence, you must take advantage of compound interest. When you compound, you reinvest interest in the principal to grow the investment.

Hence, it pays to own dividend stocks and cash-generating investments like CDs, even if the payout is low. Conversely, such investments will pay off best if you reinvest the cash.

[Related Article: How to Build a Great Dividend Stock Portfolio – Step-by-Step Guide]

6. Use an ETF Strategy Designed to Avoid Crashes

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7. Consider a Simple Index Fund

Strangely, a simple index fund that tracks an underlying index like the Standards & Poor’s S&P 500 is one of the safest investments.

For instance, the annual return of the S&P 500, the 500 most valuable publicly traded companies in America, between 1926 and 2018 was 10%. Notably, that period includes four stock market crashes: 1929, 1987, 2000, and 2008. Yet, overall market growth continued despite World War II, the Great Depression, the Cold War, September 11, many political crises, and other cataclysmic events.

Indexing can protect your money because it diversifies it. For instance, the S&P 500 contains various companies in different businesses.

Additionally, indexing protects your money from emotions because it is automatic. Hence, nobody’s prejudices influence how an algorithm picks the stocks. Instead, an algorithm picks the stocks using simple criteria, such as the companies’ value.

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[Related Article: 7 Good Reasons to Buy ETFs Over Stocks]

Thus, putting 10% to 25% of your 401K in an exchange-traded fund (ETF) like the State Street S&P SDR 500 (NYSE ARCA: SPY) can protect your money. However, indexed funds are vulnerable to short-term losses.

8. Reinvest Extra Money in an Indexed Fund

You can provide an additional layer of protection by automatically reinvesting extra cash in an indexed fund.

For instance, you can invest dividends or bank account interest in an S&P 500-indexed fund. Thus, you could lock in a 10% growth rate for at least part of your money.

Therefore, you can make compound interest part of your 401K and ensure that some of your money grows. Moreover, you can enhance compound interest by combining it with the S&P 500, which has a long growth history.

9. Invest in High Cash Companies

Some companies are better positioned to survive and thrive in a stock crash than others. In particular, companies with much money grow and make more in a crash.

For instance, Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B) expanded during the 2008 stock market crash. In 2009, Berkshire Hathaway (BRK.A) bought the Burlington Northern Santa Fe Railroad (BNSF) for $26 billion in cash and stock. Berkshire could buy them because it had lots of cash.

Hence, investing in companies with large amounts of cash is a great way to protect your portfolio from a market crash. You can learn how much cash a company has by checking its balance sheet. Companies list cash on their balance sheets as cash and equivalents, short-term investments, or cash and short-term investments.

Currently, companies with a lot of cash include:

• Berkshire Hathaway (NYSE: BRK.B)
• Alphabet (NASDAQ: GOOG)
• Apple (NASDAQ: AAPL)
• Oracle (NYSE: ORC)
• Microsoft (MSFT)
• Ford (NYSE: F)
• Facebook (NASDAQ: FB.)
• Banks. Notably, big banks like Goldman Sachs (NYSE: GS.)
• Wells Fargo (NYSE: WFC)

Concentrating your investments in high-cash industries like finance and technology is one way to protect yourself from crash effects. Moreover, avoiding low-cash companies like retailers is a good way to protect your funds.

Finally, a simple rule of thumb is only investing in companies with at least $20 billion in cash. Such companies are more likely to profit and grow during a crisis. Stock Rover provides a 10-year history and cash forecasting data for all USA and Canada stock exchanges.

10. Let the Government Protect your Money as Warren Buffett Does

Another strategy Buffett uses is to let the government protect his money. For example, giant banks are two of the five most significant investments Buffett lists in his 2019 Berkshire Hathaway shareholder letters.

Wells Fargo and Bank of America (NYSE: BAC) are those banks. Interestingly, Wells Fargo and Bank of America are two of the infamous “too big to fail” financial institutions. That means the US federal government must bail those banks out in a crisis because their collapse could trigger a depression.

The federal government bailed Wells Fargo out with $25 billion during the 2008 financial crisis. Therefore, Wells Fargo is a dividend stock that adds another layer of protection.

Hence, Buffett protects his money by investing in institutions the government will likely rescue during a crisis. He also lets the taxpayers protect their funds by investing in big banks.

Buffett thinks banks can run to Washington for help during a major crisis. Furthermore, the politicians must bail the bankers out to keep the crisis from worsening.

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11. Invest in Banks

You can use the same strategy by investing in big banks. Plus, banks offer another layer of protection through lots of cash.

The Federal Deposit Insurance Corporation (FDIC), a government agency, insures most individual bank accounts in the United States. Under those circumstances, banks offer the highest protection against a market crash.

Finally, bank stocks often pay outstanding dividends. For instance, Goldman Sachs will pay an 80₵ dividend on March 28, 2019. Consequently, you can reinvest the dividend in more bank stocks or savings to add more protection to investors.

Under these circumstances, bank stocks or bank stock exchange-traded funds are one of the best ways to protect your 401 (K) from a stock market crash. Banks are not fashionable stocks, but they can protect your money.

This is not foolproof, as many banks almost became penny stocks in the 2008 financial crisis.

12. Avoid Precious Metals

The greatest mistake you can make is to withdraw your funds from stocks and invest them in alternatives like precious metals and cryptocurrencies.

You must avoid precious metals because they lose value and do not recover. For instance, the highest historical price for an ounce of gold is $2,128.42, recorded in February 1980.

Someone who bought gold in 1980 is still underwater because the inflation-adjusted price has not reached $2,128.42 in 39 years.

Therefore, precious metals are not protected from market crashes. In fact, you will lose more money with precious metals because you will miss out on stock market gains.

Gold may not Protect Your Money.

Specifically, $2,128.42 invested in the S&P 500 in 1980 would have grown to $6,517.82. Also, the inflation-adjusted return on that money with dividend reinvestment was 11.353%.

In the final analysis, a gold investor will lose money and miss out on stock market gains. Hence, gold is not a good hedge against stock market crashes.

Notably, there were three major stock-market crashes: 1987, the 2000-2002 Dot.com bust, and the 2008 meltdown between 1980 and 2019. Yet, the S&P investor still received an 11.353% return on his investment.

Thus, precious metals do not belong in your 401K if you want to make money.

13. Stay away from Cryptocurrencies

Next-generation financial technologies like cryptocurrencies are even more dangerous than precious metals. For instance, all cryptocurrencies lost 80% of their value between January and September 2018.

Consequently, cryptocurrencies are far more unstable than stocks, so avoid them. Cryptocurrencies are more unpredictable because they are a new technology that most investors do not understand.

Cryptocurrencies do not belong in your 401K because altcoins are more likely to crash than stocks. Therefore, stay away from cryptocurrency unless you have a high tolerance for risk and money to burn.

Summary: Keeping your 401K safe

Finally, history proves stock market crashes are rare events that long-term market gains will make up.

This is a good option if you can time the market to avoid the worst of a crash.

Secondly, another way to keep your 401K safe is to keep your money in the market and use dollar-cost averaging to your advantage. Notably, the stock market erased all the losses from the 2007-2008 crash by October 2012, just four years later, and if you had doubled down on your investing during the worst periods of the crash, you would have a chance to outperform the market.

• Highly Recommended Reading: Fact-Based Research of 6 Major Stock Market Crashes & What Caused Them. The Facts About The Impact of Crashes & How To Avoid & Profit From Them.

This is not specific financial advice; I am not a registered financial advisor but a market analyst. If you are concerned about your investments, seek the help of a registered financial advisor who can provide tailored advice to suit your specific risk and portfolio requirements.

A History of Stock Market Crashes, Causes, Effects & Fixes