5 Reasons You Shouldn’t Touch Your 401(k) When the Stock Market Plunges

Pause, breathe — and don’t panic

Chris Taylor,

Updated April 04, 2025

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Published December 19, 2024

/ Updated April 04, 2025

a person with a graph showing market drops reflected in their glasses

Rob Dobi

Ever wondered why 401(k) holders shouldn’t panic during stock market slumps? Well, we were just served the perfect lesson on a platter.

U.S. stock markets tumbled on April 4, as investors grappled with President Donald Trump’s new tariff plan, mounting fears of a global trade war and growing concerns of a recession. The Dow Jones Industrial Average dropped over 2,200 points, or 5.5 percent. The S&P 500 sank nearly 6 percent. And the Nasdaq composite plummeted 5.8 percent, putting it in bear market territory with the index down over 20 percent from its record high. Those declines come on the heels of sharp sell-offs on April 3, triggered by Trump's tariff announcement.

“Negative news sells, because people are looking for things to worry about,” says Dan Egan, director of behavioral finance at investing platform Betterment. “When negative news happens, we tend to pay a lot of attention to it, like the market dropping 5 percent in a day. But if the market goes up, it doesn’t get as much fanfare, because our natural predilection is to look for scary things.”

It’s a perfectly human reaction. You see panic all around you; you see your net worth declining in real time; you get spooked. You want to preserve everything you have worked so hard for. Some people even experience a physiological reaction to financial news during periods of turbulence, with researchers drawing a connection between negative stock market information and anxiety.

We like to think of ourselves as perfectly rational beings, but we’re really not. We are susceptible to all sorts of biases, which can lead us to make poor financial decisions. In fact, there is an entire field of research, called behavioral economics, that tries to decode why we make the financial decisions we do.

For instance, making big financial moves in emotionally fraught moments, like raiding retirement accounts following a sudden stock market drop, typically leads to negative outcomes. Conversely, some people try to jump on the latest hot stock that's making headlines.

But if you're a long-term investor, your focus shouldn’t be whatever the market is doing that particular day, experts say — you should be looking 10, or 20 or even 30 years down the road. At any given moment the market can shoot up or down, and it’s not something an individual investor can control. But over time, the stock market returns around 10 percent a year.

CFRA Research’s chief investment strategist, Sam Stovall, recently ran the numbers on every market pullback (declines of 5 percent to 9.9 percent) and correction (declines of 10 percent to 19.9 percent) since World War II. His findings: In the average pullback, the market regained the lost ground in a month and a half; for corrections, it took less than four months.

The moral: Don't make knee-jerk decisions regarding your 401(k) when the market plunges. Stay calm and keep up with your contributions. That may not sound very exciting, but it is generally your best option for lasting wealth, research shows.

Fidelity Investments put together a hypothetical portfolio of $10,000 invested in 1980 through the end of 2022. Individuals who stayed invested the whole time would have ended up with a healthy $1.082 million, the analysis found. Those who missed the market’s five best days over that time frame would have been left with $671,051. Miss the best 10 days and you were down to $483,336. Miss 30 days and the balance dwindled to just $173,695.

To stay the course during turbulent times, you’ll need to keep your instincts in check and put some guardrails in place. Here are five reasons why experts say you shouldn’t raid your 401(k) when the stock market takes a nosedive.

1. Stocks aren't your only asset (or shouldn't be)

If the stock market is gyrating wildly and your 401(k) is 100 percent invested in stocks, you are more likely to panic. One way to avoid that emotional response is with proper asset allocation, with your portfolio spread out between asset classes.

“Have some stable things in your portfolio like certificates of deposit, cash and bonds,” says Rob Williams, managing director of financial planning at the Schwab Center for Financial Research. A diversified portfolio “will provide a cushion, so you have some money that won’t move around in value as much. That knowledge will keep you from [making] any extreme reactions.”

2. Your income probably won’t be affected

Many investors who are close to retirement or are already retired tend to like dividend-paying stocks, for the reliable cash flow they generate. In such cases, “if you are an income-oriented investor, you will be unaffected by a slump,” says Stovall. “Unless companies cut their dividend, your income stream will be unchanged.”

So sit tight and keep enjoying those dividend checks — no matter what the market is doing.

3. A market downturn could be a good time to buy, not sell

The early 401(k) withdrawal bomb

If you have amassed a healthy retirement account, congratulations. But there is also bad news: With a pot of money sitting right there, you might be tempted to make withdrawals in times of stock market turbulence.

You should avoid that scenario if you can, for a couple reasons. One is the significant tax hit: Money you withdraw from a retirement account before age 59½ is, in most cases, subject to a 10 percent penalty (plus state penalties in some cases).

Withdrawals also mean that you’ll be missing out on potential investment appreciation. If your retirement plan was counting on that money to gain around 7 percent a year — well, that’s gone now, for however much you've taken out.

A better strategy would be to take out a 401(k) loan, which doesn’t count as a withdrawal. Essentially, you lend money to yourself, and then pay it back over time through payroll deductions.

Bottom line: Only withdraw retirement money if you are in dire straits and have nowhere else to turn to keep food on the table or a roof over your head. If you are simply scared by momentary market dips, the last thing you should be doing is making an early withdrawal from your 401(k) – and torpedoing your financial future.

Market plunges don’t feel great for shareholders, of course. But it’s all a matter of perspective, because for buyers looking to invest, slumps can actually be a good thing.

“Short-term blips can be buying opportunities,” says Egan. “It’s a good time to get stuff on sale.”

“In the short-term, things feel scary,” he adds. “But it is actually a nice moment to take advantage of other people’s panic.” Read: Rather than mess with your 401(k), you might consider purchasing bargain-priced stocks.

4. You don’t have to make big decisions alone

A second opinion, whether from a relative, a close friend or a financial planner, can provide perspective if you are about to take an extreme action.

“Run by that person the transactions you plan on making,” says Stovall. “That person might push back: ‘Is this really something you want to be doing?’ That financial adviser or family member can be your conscience, essentially. They can help you by stopping you from making bad moves at bad times.”

A second opinion could even come from something inanimate, like a written financial plan that outlines your path to retirement. (A retirement coach can help you craft one.) Consult the plan and stick to it instead of veering wildly off-course.

5. Stock market news is not the boss of you

The rise of 24/7 sources for financial news gives us access to more information than we’ve ever had before. But it can also play to our worst instincts.

“Retirees have more time on their hands, so they pay a lot of attention to their finances,” says Williams. “But [the news] can be very stressful if you watch it all the time. Short-term news creates a lot of anxiety, designed to sell advertising — and if you allow it to drive your investment decisions, it can lead to adverse outcomes.”

Same goes with looking at your 401(k) balance. It’s addictive, but experts say it can lead to rash decisions, such as withdrawing money before age 59½, which would likely cause you to get slapped with early withdrawal fees of 10 percent of the amount taken out. (See "The Early 401(k) Withdrawal Bomb" box for more details.)

“You don’t need to check your portfolio daily, or even monthly,” says Williams. “Checking it quarterly or semiannually is probably sufficient for most.”

A final reminder: The stock market will rise and fall, because that’s what it does. But remember, if you sell when stocks fall off a cliff, you’ve just locked in that loss for good.

“When people say, ‘I lost half of my portfolio in the recent bear market,’ my usual response is, ‘Well, you sold at the bottom.’ " Stovall says, "If you don’t sell, you don’t lose.”

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Chris Taylor is a senior correspondent with Reuters, covering personal finance and workplace issues. He is a frequent contributor to Fortune, and has won journalism awards from the National Press Club, the Deadline Club and the National Association of Real Estate Editors.