‘We’re not robots’: As recession looms, Americans may be unsure about what to do with their 401(k) — here’s what experts recommend

Times like these may have long-term investors wondering what they should do to protect their portfolios, and the answer is usually “Do nothing.”

“Generally, the advice boils down to staying invested. But I firmly believe that just saying ‘stay invested’ doesn’t work on days when stocks are in free-fall and the world feels terrible,” said Callie Cox, chief market strategist for Ritholtz Wealth Management, to The Washington Post. “We’re not robots, we’re humans with emotions, and we need to honor that in times like these.”

The truth is reacting to volatility with panic selling is like abandoning ship because you hit a wave. As legendary investor Peter Lynch put it in a September 1995 interview with Worth magazine, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.” The key isn’t to predict the next dip; rather it’s about staying in the market long enough to recover.

Why you shouldn’t panic sell

Watching the portfolio you’ve built for retirement fluctuate can be unsettling, especially when market downturns threaten the very assets you plan to rely on.

However, reacting impulsively, selling and moving your money to the sidelines would not be the best course of action. It’s possible you would miss some of the biggest gains in the market when it eventually recovers. Timing the market is difficult even for the experts.

“Seventy-eight percent of the stock market’s best days have occurred during a bear market or during the first two months of a bull market,” wrote Hartford Funds. “If you missed the market’s 10 best days over the past 30 years, your returns would have been cut in half. And missing the best 30 days would have reduced your returns by an astonishing 83%.”

Rather than pulling everything out and hiding it under your mattress, a more strategic response is to spread your investments across different asset classes and sectors. Diversification doesn’t eliminate risk — nothing truly does — but it helps soften the blow when certain sectors tank.

For instance, as the U.S. market underperforms regions like China and Europe, investors have been advised to buy up international assets to achieve geographical diversification. Vanguard says that at least 20% of your overall portfolio should be invested in international stocks and bonds. Diversification isn’t just about protecting your portfolio – it’s about building resilience. That’s why holding investments beyond the S&P 500 can act as a good cushion when the economy hits a rough patch.

Nearing retirement

As you near retirement, market volatility and ongoing inflation can make the road ahead feel especially precarious.

But reacting to short-term turbulence with long-term portfolio changes can be a costly misstep.

According to Fidelity, missing just the market’s 10 best days over the past 40 years has historically reduced wealth by as much as 54% — a costly outcome for a moment of panic.

That said, shifting your asset mix slightly may be a wise move. Make sure your asset allocation fits your investment horizon. Financial experts recommend maintaining some exposure to cash and high-quality bonds — without going overboard on caution.