401(k) savers told that riding out the bumps on Wall Street often is the best way to go

Summer's stock market sell-off in early August scared some into asking themselves: Should I start bailing on my 401(k) now?

It's a natural question, especially for some savers who only remember stocks going up and hearing about the stock market breaking record highs in July.

Sure, Wall Street did rally after two pretty miserable days like Monday when the Dow Jones Industrial Average lost an incredible 1,033.99 points. It was a 2.6% loss for the day, nothing like some historic double-digit plunges. Nothing like the ugly days for stocks at the start of pandemic-related shutdowns when, for example, the Dow lost nearly 3,000 points or 12.93% in just one day on March 16, 2020.

So far, we're not looking at anything close to a major meltdown here. But several market watchers warn that we could see more volatility for the stock market — including some unsettling sell-offs — in the weeks ahead since we're dealing with what could be a close presidential election in November, added fears about the possibility of a recession ahead, and more concern about when the Federal Reserve will start cutting interest rates.

No doubt, every twist and turn from here on out will be amplified during the election. GOP contender former President Donald Trump called the early August falloff the "Kamala Crash" as he tried to fuel fears about the economy in his battle with Democratic candidate Vice President Kamala Harris.

It was hardly a crash in early August. The Dow Jones Industrial Average rebounded Tuesday. Wednesday was a bit of an up and down day. But the Dow closed at 38,763.45 points on Wednesday, down 234.21 points or down 0.6%.

On Wednesday, General Motors stock closed at $40.65 share, up 0.1% or 4 cents a share. Ford Motor Co. closed at $9.77 a share, up 1.45% or 14 cents a share. Stellantis closed at a $15.39 share, down 1.16% or down 18 cents a share.

David Sowerby, managing director and portfolio manager for Ancora Advisors in Bloomfield Hills, said he might rank the latest market sell-off as a 1.5 on a scale of 10. He'd give a 9 to the gut-wrenching downturn in 2008-09 when stocks sold off about 50% overall.

The Standard & Poor's 500 index closed at a record high of 5,667.20 points on July 16. But the S&P 500 had fallen by 8.25% from July 16 through Wednesday's close of 5,199.5 points.

But back to the first and other key questions:

What do I do with my 401(k)?

Sowerby's advice: "Don’t tap your 401(k) for withdrawals unless absolutely necessary."

Typically, you'd want to review your asset allocation as a matter of course, with or without a market sell-off. "It is wise to review given your longer term objectives, return goals and risk tolerance," Sowerby said.

Do I have too much money riding on 1 horse?

This is one issue most investors should address at any time. Maybe you did do well with one stock but should you unload some of it and take some risk off the table?

Sowerby said investors want to avoid too much market concentration in one area when it comes to taking into account all of your investments, including your 401(k) and any other outside investments. The Magnificent 7 tech stocks are off 15% from their highs, he said, and represent one area of too much concentration for many investors. The group: Apple, Google-parent Alphabet, Amazon, Microsoft, Nvidia, Meta Platforms and Tesla.

"Be aware of how much your large company tech exposure is within your mutual funds," Sowerby said. "That has been weak for the last month, following longer outsized gains."

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What if I have a chunk of my 401(k) invested in my company stock?

It's better to diversify. Set it and forget it isn't always the best approach. Many people lost a great deal of their retirement savings over the years when their company stock imploded, such as when General Motors filed for bankruptcy in 2009. Old GM stock became worthless.

But the news says its bad

Most financial advisers suggest that 401(k) investors not react suddenly to headlines.

"Overall things will likely continue to be volatile until there is more clarity as to what the Fed might do on September 18th," said Sam Huszczo, a chartered financial analyst in Southfield.

"And remember, the markets will likely react before the meeting itself due to speculation."

The first rate cut is a move that would be viewed as a boost for the economy. The Fed raised rates 11 times since March 2022 to fight skyrocketing inflation after the pandemic. The last Fed rate hike was in July 2023.

The Federal Reserve kept the short-term federal funds rates at its range of 5.25% to 5.5% after its last meeting in July, a range it has been at for the past year even as inflation has cooled off.

The Fed's next scheduled meeting is Sept. 17 and Sept. 18. Many had already expected a small rate cut in September, but some wonder if the rate cut could be larger then.

No, things aren't likely to be smooth

"When it comes to market volatility, we always suggest taking a long-term approach to saving and avoiding making changes based on short-term economic swings — whether they be positive or negative," according to Michael Shamrell, vice president of workplace thought leadership at Fidelity Investments.

"It is riding out the ups and downs of the market that will pay off in the end," Shamrell said. "Staying the course with your investments is often the best decision during periods of market volatility."

The Fidelity site includes six tips to manage volatile markets.

No. 1 on that list: Keep it all in perspective. "Historically," Fidelity notes, "U.S. stocks have experienced three downturns of 5% per year, one correction of 10% per year, and one correction of (approximately) 15% every three years."

While it's tempting to try to sell out of stocks to avoid the next downturn, many people aren't able to time the market just right.

Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X (Twitter) @tompor.