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 my 401(k) to bonds?” consider the potential pros and cons of making such a move.

Also, 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’s because when stock prices fall, bond prices tend to rise. When a bear market goes hand in hand with a recession, it’s typical to see bond prices increasing and yields falling just before the recession reaches its deepest point. 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. That can be a key component of trying to protect your 401(k) from a stock market crash.

Should I Move My 401(k) to Bonds?

Whether it makes sense to move assets in your 401(k) away from mutual funds, target-date funds or exchange-traded funds (ETFs) and toward bonds can depend on several factors. Specifically, those include:

Years left to retirement (time horizon)
Risk tolerance
Total 401(k) asset allocation
401(k) balance
Where else have you invested money
How long do you expect a stock market downturn to last

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

1. Your 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, such as 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, then 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. Your Portfolio’s Diversification

It’s also important to look at the bigger financial picture in terms of where else you have money invested. Diversification matters for managing risk in your portfolio and before switching to bonds in your 401(k), it’s 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. The 60/40 rule, for example, dictates having 60% of your portfolio in stocks and 40% dedicated to bonds. Or you may use the rule of 100 or 120 instead, which advocates subtracting your age from 100 or 120. So, if you’re 30 years old and use the rule of 120, you’d keep 90% of your portfolio in stocks and the rest in bonds or other safer investments.

Ultimately, this could be a very personal decision so it’s 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 bear market impacts on 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 you ride the market back up. 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. Treasury-Inflation Protected Securities or TIPS, for example, might sound good in a bear market since they offer some protection against inflationary impacts but they may not perform as well as U.S. Treasury bonds. And shorter-term bonds may 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 decreasing as stock prices drop, that’s not necessarily a reason to overhaul your asset allocation. Here are key strategies to 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 buying 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—selling assets that have held up better and buying those that have fallen more—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 decisions that undermine 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.

Bottom Line

Moving 401(k) assets into bonds could make sense if you’re closer to retirement age or you’re generally a more conservative investor overall. However, doing so could potentially cost you growth in your portfolio over time. Talking to your 401(k) plan administrator or your financial advisor can help you decide the best way to weather 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.