Should I Move the Money in My 401(k) to Bonds?

An employer-sponsored 401(k) plan may be an important part of your financial retirement plan. Managing those investments wisely means keeping an eye on market movements. When a bear market sets in, you may be tempted to make a flight to safety with bonds or other conservative investments. If you’re asking yourself, “Should I move the money in my 401(k) to bonds?” these are the potential pros and cons of making such a move.

Also, you could consider talking with a financial advisor about what the wisest move would be for your portfolio.

Bonds and the Bear Market

Bear markets are characterized by a 20% or more decline in stock prices. There are different factors that can trigger a bear market, but generally, they’re typically preceded by economic uncertainty or a slowdown in economic activity. For example, the most recent sustained bear market lasted from 2007 to 2009 as the U.S. economy experienced a financial crisis and subsequent recession.

During a bear market environment, bonds are typically viewed as safe investments. That is because when stock prices fall, bond prices tend to rise. When a bear market coincides with a recession, it’s typical to see bond prices increase and yields fall just before the recession reaches its peak. Bond prices also move with interest rates, so if rates fall – as they often do in a recession – then bond prices rise.

While bonds and bond funds are not 100% risk-free investments, they can generally offer more stability to investors during periods of market volatility. Shifting more of a portfolio’s allocation to bonds and cash investments may offer a sense of security for investors who are heavily invested in stocks when a period of extended volatility sets in. This can be crucial when trying to protect your 401(k) from a stock market crash.

Should I Move the Money in My 401(k) to Bonds?

There are times when it may make sense to move assets in your 401(k) away from mutual funds, target-date funds or exchange-traded funds (ETFs) and toward bonds. This can depend on several factors.

Time horizon (years left to retirement)
Risk tolerance
Total 401(k) asset allocation
401(k) balance
Your other investments
How long you expect a stock market downturn to last

Specifically, there are three things you should consider to help you determine whether you should move your 401(k) to bonds or not.

1. Age

First, consider your age. Generally, the younger you are, the more risk you can afford to take with your 401(k) or other investments. That’s because you have a longer window of time to recover from downturns, including bear markets, recessions or even market corrections.

If you’re still in your 20s, 30s or even 40s, a shift toward bonds and away from stocks may be premature. The more time you keep your money in growth investments like stocks, the more wealth you may be able to build leading up to retirement. Given that the average bear market since World War II has lasted 14 months, moving assets in your 401(k) to bonds could cost you money if stock prices rebound relatively quickly.

On the other hand, if you’re in your 50s or early 60s, you may already have begun the move to bonds in your 401(k). That might be natural as you lean more toward income-producing investments, such as bonds, versus growth-focused ones.

2. Portfolio Diversification

It is also important to look at the bigger financial picture by considering where else you have money invested. Diversification matters for managing risk in your portfolio. Before switching to bonds in your 401(k), it is helpful to review what you’ve invested in your IRA or a taxable brokerage account. You may already have bond holdings elsewhere that could help to balance out any losses triggered by a bear market.

As you get closer to retirement, it’s natural to shift your 401(k) allocation toward more conservative investments like bonds. Still, maintaining some exposure to stocks can help your portfolio keep pace with inflation and continue to grow. Regularly reviewing and rebalancing your portfolio ensures that your investment mix stays aligned with your changing goals and risk tolerance.

3. Asset Allocation

There are various rules of thumb you can use to determine your ideal asset allocation.

One example is the 60/40 rule, which is when you have 60% of your portfolio in stocks and 40% dedicated to bonds. Another rule is the rule of 100 or 120, which is when you subtract your age from 100 or 120. That means if you’re 30 years old and use the rule of 120, you would keep 90% of your portfolio in stocks and the rest in bonds or other safer investments.

Ultimately, this is a very personal decision, so it is best to consult with a professional financial advisor about how it could impact your portfolio and future goals.

Investing in Bond Funds

Bond mutual funds and bond ETFs could be a more attractive option than traditional bond investments if you’re worried about a bear market impacting your portfolio. With bond ETFs, for example, you can own a collection of bonds in a single basket that trades on an exchange just like a stock.

This could allow you to buy in low during periods of volatility and benefit from price appreciation as the market recovers. Sinking money into individual bonds during a bear market or recession, on the other hand, can lock you in when it comes to bond prices and yields.

If you’re weighing individual bonds, remember that they aren’t all alike and the way one bond reacts to a bear market may be different than another. For example, Treasury-Inflation Protected Securities, or TIPS, might be appealing in a bear market since they offer some protection against inflationary impacts, but they may not perform as well as U.S. Treasury bonds. You may also find that shorter-term bonds fare better than long-term bonds.

How to Manage Your 401(k) in a Bear Market

When a bear market sets in, the worst thing you can do is hit the panic button on your 401(k). While it may be disheartening to see your account value decrease as stock prices drop, that’s not necessarily a reason to overhaul your asset allocation.

These strategies can help protect and potentially grow your retirement funds during market downturns.

Resist the urge to panic sell: Market downturns are temporary, and selling investments at low points locks in losses. Historical data shows that investors who stay the course through bear markets typically recover their losses and continue growing their wealth when markets eventually rebound.
Review your asset allocation: Bear markets present an opportunity to reassess whether your investment mix aligns with your risk tolerance and time horizon. Consider whether your current balance of stocks, bonds and other assets still makes sense given your retirement timeline and financial goals.
Consider dollar-cost averaging: Continuing regular contributions during market downturns means you’re able to buy shares at discounted prices. This strategy can significantly lower your average cost per share over time and position your portfolio for stronger growth when markets recover.
Look for rebalancing opportunities: Market declines often create imbalances in your target asset allocation. Rebalancing allows you to sell assets that have held up better and buy those that have fallen more. It helps maintain your desired risk level while potentially enhancing returns by buying low and selling high.
Focus on the long view: Retirement accounts are long-term investments, and bear markets have historically been temporary setbacks in an overall upward trajectory. Maintaining perspective on your investment timeline can help prevent emotional investing that undermines long-term growth.

Knowing how to manage your 401(k) in a bear market can transform challenging times into opportunities. By staying disciplined, maintaining regular contributions and making strategic adjustments, you can potentially emerge from market downturns with a stronger retirement portfolio positioned for future growth.

Alternatives to Moving Your 401(k) to Bonds

Instead of fully shifting your 401(k) into bonds during market downturns, some investors take a more flexible approach. These strategies aim to manage risk while still leaving room for long-term growth.

Adjusting Within Target-Date Funds

If you are invested in a target-date retirement fund, it already reallocates automatically over time, moving from stocks to bonds as you approach your target retirement year. However, if you are uncomfortable with the pace of that transition, you might consider switching to a fund with an earlier target date. This can shift your exposure to bonds without manually rebalancing your entire portfolio.

Creating a Bond “Bucket” for Short-Term Needs

Rather than converting your full 401(k) allocation, you can create a bond allocation bucket equal to your expected withdrawals over the next three to five years. This can help ensure you will not have to sell equities during a market downturn. The rest of your portfolio remains in growth-oriented investments that can recover over time.

Using Stable Value or Capital Preservation Funds

Some 401(k) plans offer stable value funds or capital preservation options. These are not bonds but can provide a fixed-income-like experience with limited volatility. Allocating a portion to these funds can be an intermediate step between stocks and traditional bonds, especially for investors who are not ready for a full shift to fixed income.

Bottom Line

Moving 401(k) assets into bonds may make sense if you’re nearing retirement age or you’re generally a more conservative investor. However, doing so could potentially limit portfolio growth over time.

Talking to your 401(k) plan administrator or your financial advisor can help you decide the best way to navigate a bear market or economic slowdown while preserving retirement assets.

Tips for Retirement Planning

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You may want to consider using an investment calculator to help you determine how much your contributions could grow over time.