I’m Nervous A Recession is Looming, Should I Flip my 401(k) To Cash?

When I first started investing in stocks, one of the worst feelings was checking my portfolio in the midst of a market downturn and seeing the value of my portfolio plummet. After years of torturing myself, I’ve since pledged not to do that.

Instead, nowadays, I check my investments a few times a year to make sure my portfolio doesn’t need rebalancing. But checking my 401(k) every week would be something that messes with my mental health, so I don’t it.

In this Reddit post, we have someone who’s worried about a near-term recession. With 90% of their retirement savings in securities and only 10% in cash and bonds, they’re thinking of cashing out their investments and only holding cash for retirement.

I think this approach is potentially dangerous. But that doesn’t mean they shouldn’t back away from stocks at all.

It’s a matter of where you are on your investing journey

I have a really hard time responding to this post for one big reason — the poster doesn’t share their age. That’s a big deal, because my advice for someone who’s two years from retiring is different than for someone who may not be retiring for 15 years or more.

If the poster is close to retiring, I’d say definitely cut back on stocks — and that has nothing to do with whether a recession is imminent or not. It’s a smart thing to scale back on stocks and shift over to a more conservative portfolio when retirement is right around the corner. And I would automatically tell any near-retiree to have at least one year’s worth of expenses in cash and cash alone.

But if the poster is 42 with plans to retire in their 60s, I don’t think they need to take much action. They could potentially scale back on stock exposure a little bit. But they shouldn’t move all of their savings into cash.

Keeping a nest egg in cash during the wealth accumulation phase could result in inadequate savings. So while the poster may not need 90% of their portfolio in the stock market, I’d say that keeping 75% to 80% isn’t a poor choice — unless doing so really causes them to lose sleep. In that case, it may be worth it to sacrifice some potential returns for the sake of their mental health.

A financial advisor can help

I can understand why the poster might be worried about a recession. But even if that happens and stock values fall, it’s important to remember that market downturns tend to be temporary.

When downturns really become a problem is when you’re pulling from your portfolio. If that’s not about to happen, then a downturn can be waited out.

Still, that’s a hard thing to wrap one’s head around. So I would strongly suggest that this poster, and anyone else who feels similarly, consult a financial advisor.

An advisor can explain why recessions aren’t necessarily portfolio-destroying events in the long run. They can also help you come up with a suitable asset mix based on where you are in your savings journey.

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