How do I protect my 401(k) from market drops?

Sudden market dips can leave investors wondering how to shield their retirement savings.

Millennials who watched their parents lose money in the 2008 financial crash understand how dangerous a downturn can be for a person whose retirement savings are invested in the market. By March 2009, stocks slid more than 50 percent before bottoming out -- and took nearly a decade to return to setting new record highs. 

Inevitably, markets pull back and suffer bouts of volatility. To make sure your savings can ride out these storms with minimal damage, here's what experts recommend. 

Diversify, diversify, diversify 

Putting all your retirement money into a single stock or one type of investment vehicle is considered unwise. If that investment goes south, you could lose everything. In general, financial experts recommend buying a mix of assets, or diversifying, because it's nearly impossible to predict when a single stock will take off ... or fail.  

"With diversification, you'll never make a killing, but you're less likely to get killed. It's the path to steady growth as it smooths out the ride along the way," Kyle Moore, CFP and founder of Quarry Hill Advisors told CBS MoneyWatch. He advises that investors should own every stock in the market through a global index fund as the core of their portfolio. 

A diversified portfolio can include:

  • Large and small companies
  • Different industries or sectors
  • U.S. and overseas securities
  • Bonds

And, of course, a stash of cash never hurts in event of emergency. "Ideally, everyone should have a percent in cash, to be able to purchase additional portions during downturns to [dollar] cost average," said Pierre Jouve, president and CEO of InsuraWealth. Dollar cost averaging refers to an investing strategy that steadily adds smaller amounts into investments over time rather than making big investments at once.  

Rebalance

A diversified portfolio might have a mix of 60 percent stocks and 40 percent bonds.

To maintain that allocation, you may need to some automatic rebalancing of a portion of the portfolio, which creates the opportunity for investors to keep their mix of assets in check. For instance, if either part of your investment mix moves +/-5 percent in a given period of time (such as monthly or yearly), the mix can be adjusted so that it returns to the original ratio. Such measures can help cushion your retirement savings from a downturn, although no investment is risk-free.

When and how

Keep in mind that age is a factor. If you're planning to retire in 30 years, a portfolio that's more geared to growth (with higher-yielding assets that may be subject to higher volatility) may be more advisable than for someone who's nearing retirement and looking to begin withdrawing their money from the market or living off a portion of the income from those investments. 

"Thirty-somethings … should be the most aggressive and should never try to time the market (no one should try to time the market) and jump in and out," said Paul V. Sydlansky, founder and CFP at Lake Road Advisors. He added that 50- or 60-year-olds "should pay more attention and should generally be more conservative, because they'll be needing the money sooner than a 30-year-old."

And of course, "a 70-year-old who's retired will need to be the most conservative, assuming they're living off the money," Sydlansky noted. 

Knowing when you plan to retire and what you'll be spending in retirement are key factors to consider when choosing a portfolio mix. Ask yourself: How much money do you need to retire? How long before you'll need it?