"Set it and forget it" has long been the advice for 401(k) savers, especially when they are just starting out. Still, in the current economy where stocks are up and down, tariffs are in and out and the prospect of a recession is increasing, that strategy may not work for everyone.
After all, there is more to retirement planning than choosing funds when you are in your 20s and forgetting about your investments for the next forty-plus years. Your time horizon, risk tolerance and asset allocation all come into play, and that will undoubtedly change over time.
“It’s not enough to pick your fund and not think about it again, but it’s too much to revisit your funds every time things aren’t going well,” says Steve Parrish, professor of Practice, Retirement Planning at The American College of Financial Services.
“Maybe you’re planning to retire sooner — or later. This may call for a change in your funds. But to react when markets are in turmoil is neither productive nor advisable. “
When 'set it and forget it' makes sense
"Set it and forget it" makes the most sense for people in the accumulation phase of retirement saving, who have many years left to save. They don’t need to react to short-term market fluctuations, provided they already have a well-diversified portfolio across different asset classes.
“There is always something. We had Covid in 2020, a potential recession in 2022 and now tariffs and a fight with the Fed,” says Derrick Longo, a wealth advisor at Exencial Wealth Advisors. “Making changes often, especially when you have a long time before retirement, increases the chances of missing out.” Reacting to short-term “noise” could end up hurting more than helping, he says.
Let’s say you've been following the markets and heard that international stocks are doing well in an environment where tariffs are increasing.
If you move money there and already have a fund that provides similar exposure, you could end up overallocated. Or, if you decide to move to cash, you could miss out on any upside that comes when the stock market rebounds, which it historically does. Plus, you may end up buying high and selling low, a cardinal sin in investing.
Take the big sell-off a couple of weeks ago as evidence. There were some investors who got out of the markets, moving all their money to cash, only to see stocks rally 9% the next day.
“There were investors out there that assumed bad stuff was about to happen, and all of a sudden, we had a 9% return in a single day. That’s what we hope to get in a year,” says David Blanchett, managing director, portfolio manager and head of retirement research for PGIM DC Solutions.
“Where investors get themselves into trouble is figuring out when to reenter the market. That creates the most significant losses in the long term.”
When 'set it and forget it' does not make sense
The key reason to "set it and forget it" is if your investments are well-diversified and are growing in something like a target-date fund, which is tailored to your age and ideal risk level at that point in your career.
But if your risk tolerance, time horizon and retirement goals have changed since you started investing, "set it and forget" could actually hurt you. That’s because the market gyrations we’ve seen in recent weeks could throw your asset allocation out of whack.
“During those times of great volatility, actively rebalancing the funds back to the original diversification levels is a kind of buying low and selling high that can be very useful to lowering the risk in the account and increasing the return over time,” says Christopher R. Manske, a certified financial planner and president of Manske Wealth Management.
“Additionally, as the years go by, people should slowly lower the risk profile overall in their 401(k) so that it doesn’t suddenly lose a lot of money right before they are about to retire. This means "set it and forget it" should be avoided because that mentality leaves a lot of potential problems on the table.”
Retirement on the horizon?
If you plan to retire in five years, "set it and forget it" may not work in your favor, says Longo. At this point, you are getting ready to start drawing down on your retirement savings and, therefore, can be more impacted by near-term losses in the stock market.
That doesn’t mean you should move to all cash, but you should assess your portfolio to make sure it's aligned with your risk tolerance.
The good news is that many 401(k) plans offer employees access to a financial adviser. Now is a good time to reach out to a professional to help you determine if a reallocation is necessary.
“You don’t want 100% growth when you are nearing retirement but when the market is down 20% or 30% it's not the best time to reallocate. Work with an advisor to come up with a plan. Don’t just react based on emotion or market news. Make a plan of action first,” says Longo.
If retirement is on the horizon, Longo says to check your plan quarterly and try to avoid checking your balance daily or weekly.
What you can do either way
When the markets are going south, it can be hard to resist making moves to limit the downside. However, money watchers say a better approach is to act on things that are within your control, rather than focusing on those that are not.
That could mean saving more in your 401(k), reining in spending and getting out of debt. With talk of a recession on the rise, addressing other areas of your finances may prove more prudent than overhauling your 401(k).
“Consider getting rid of unneeded subscriptions, look at whether you can be more efficient in your tax planning, or even consider putting off retirement until you’re more comfortable with meeting your income goals,” says Parrish.
“But don’t solve the problem of unstable markets by trying to outsmart the economy. Look at the 9/11 market tumble, the Great Recession, and the Covid market scare — in all these cases, waiting out the market was the best move.”
