Market volatility and trading volumes reached new levels recently. Making smart, confident investing decisions means having a plan — not just in the coming days but for the long term.

For many individuals, this includes participating in an employer-sponsored 401k plan as part of a retirement portfolio. One of the most widely used investment vehicles for retirement, 401k plans allow you to contribute to your future with tax efficiency.

If you’re contributing to or have a 401k, you may be keeping a close eye on it and observing performance during market volatility. In times of uncertainty, retirement savers fear the impact of a potential recession on their retirement plan.

Depending on your age, asset allocation, risk tolerance, and long-term financial goals, you may ask yourself, “Is my 401k protected from market downturns? If not, how can I create a plan so my retirement has the best possible chance for withstanding a market crash?”

You can get perspective using Personal Capital’s Recession Simulator. This free, interactive tool shows you how your retirement plan would have been impacted by a market event like the Dotcom Crash or 2008 Financial Crisis.

How to Optimize Your 401k Plan for Volatility

1. Make Sure You Have a Solid Plan That Aligns with Your Long-Term Goals.

Trying to navigate uncertain times without setting financial goals and having a strategy can make volatile periods even more difficult to handle. If you don’t know how much you will need to have in your nest egg for retirement, it becomes difficult to assess how you are tracking for retirement, and how your portfolio might handle bear markets and recessions.

In order to plan for retirement and establish long-term financial goals, you should consider several factors, such as:

A professional financial advisor — preferably a fee-based fiduciary — can assist you with building a financial strategy that will best position you to meet your long-term goals. Investors seeking a tool to help keep track of their retirement goals and progress can access the Retirement Planner by signing up for Personal Capital’s free financial tools.

After developing long-term goals, you should be able to establish how much you will need in your 401k to support your lifestyle. You should also think about not only how much you’ll need, but where you should be saving with advice from either your financial advisor or help from Personal Capital’s Savings Planner. How much cash should you have? Should you contribute to a 401k and an IRA?

Again, working with an advisor to determine the proper asset allocation for your investments will help move you closer to reaching your ultimate goals.

The last part of having a solid plan for retirement is ensuring that you’re invested in a properly diversified portfolio (read this article to learn more about what this means).

Where possible — and this will depend on your 401k plan’s investment options — a globally diversified portfolio of U.S. and International stocks and bonds, as well as alternatives, could help safeguard your 401k from massive drops, and may reduce your risk during market crashes. Consult your financial advisor for the right mix of investments based on the available fund options within your plan.

2. Learn the Art of Rebalancing.

Along with setting long-term financial plans and ensuring that your 401k is diversified, strategically rebalancing could reduce your risk to market volatility.

So what is portfolio rebalancing? It’s the practice of keeping strategies close to their target allocations, typically by selling what has done best and buying what has fared worse. This is somewhat counterintuitive, at least on an emotional level, but this is buying low and selling high, and over time, it can have a really meaningful positive impact. Rebalancing also tends to work more during periods of volatility, so while it may feel uncomfortable, bear markets are actually good rebalancing opportunities.

Overall, diversified portfolios with a mixture of various assets will help alleviate an investor’s exposure to risk. We generally advise that you look to rebalance your 401k portfolio on a quarterly or semi-annual basis to keep your asset allocation in line with your retirement goals.

3. Keep Contributing to Your 401k.

Fear in the market often causes investors to panic and stop contributing to their 401k altogether during the periods of volatility. It is important to be prepared during uncertain times and have enough cash (generally 3-6 months of living expenses) in your emergency fund, but investors should continue to contribute to their 401k if they have the ability to do so. Bear markets and crashes cause the prices of some assets to go down, so looking at the down market as a buying opportunity can help increase overall return when the markets eventually rebound.

The other thing that can happen in down markets is that investors may try to “time the bottom” of the market and wait to contribute money. Instead of trying to time the market, investors who have enough in their emergency savings should prioritize continuing to contribute to their 401k. Getting into the market sooner than later is generally a mentality that will reap rewards over the long-term horizon. Here’s a case study that illustrates an important concept: It’s about time in the market, not timing the market.

If you have an employer-match program, you should raise your contribution (if you have enough in your emergency fund and are already not taking advantage of the match program) to at least the amount that will get you the full match. Those additional funds may help make up for some of the potential losses caused by a market crash. For example, if an employer matches up to your first $3,000 contributed to your 401k, you should at least invest that amount in order to take advantage of the full employer match.

4. Stay Calm and Disciplined.

Market downturns can be reasons for anxiety and emotional panic for many, especially as it relates to their hard-earned money in their 401k retirement plans. While the fear around a volatile market may make you feel the need to do something, anything, sometimes the best thing to do is just stay calm and stick to your long-term strategy. In other words, if you have a solid financial plan, and your 401k is well-optimized, oftentimes the best thing to do in a market crash is to do nothing, especially if you are a younger investor with years until retirement.

Nearly 3 million individuals use Personal Capital’s free tools to manage their money. From an investing standpoint, you can use the free tools to:

If you are closer to retirement, market crashes can be even scarier. But being properly prepared is key. Make sure you stay in close communication with your financial advisor in the years leading up to your retirement to ensure that your risk tolerance and asset allocation reflects your shortening time horizon. Here are some questions to ask your advisor if you are retiring or about to retire in times of volatility.

This content was originally published here.

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