The gulf between President Donald Trump and Federal Reserve Chair Jerome Powell is widening, with each holding very different views on the future of U.S. monetary policy.
Trump and his administration have even floated the idea of firing Powell, an action that would almost certainly further erode confidence in both U.S. markets and the broader economy. The conflict stems from Trump’s frustration that Powell has not moved to cut interest rates.
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It is important to remember that Powell and the Federal Reserve do not report to the president. Instead, they make policy decisions such as interest rate adjustments and balance sheet management based on two core objectives: keeping inflation stable and supporting maximum employment.
In a recent speech to the Economic Club of Chicago, Powell issued a warning that those goals may soon be in conflict, stating, “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension.”
Powell was alluding to stagflation, a situation where inflation remains high while economic growth slows or contracts. Those who remember the late 1970s and early 1980s will recall a time when the effective federal funds rate approached 20% during a time of stagflation as the Federal Reserve aggressively combated runaway inflation at the short- and medium-term expense of investors, workers and retirees alike.
Regardless of whether Trump’s current trade wars and tariffs lead to a recession or stagflation, you can follow some time-tested principles to protect your retirement savings and position yourself for long-term success.
Here are eight expert-recommended rules for managing your 401(k) during a recession:
— Don’t make emotional trades.
— Build a strong emergency fund.
— Increase your contribution amount.
— Find the courage to buy the dip.
— Don’t ignore money market funds.
— Write an investment policy statement.
— Rebalance your asset allocation.
— Stress-test your portfolio.
Don’t Make Emotional Trades
Markets are influenced not only by economic shocks and company fundamentals but also by the invisible hand of investor sentiment. Fear and greed can drive prices just as much as earnings reports or interest rate decisions. That does not mean you need to participate in the panic.
“It can be tempting to completely reposition your 401(k) during bad times, but this is almost always the wrong decision,” says Anessa Custovic, chief investment officer at Cardinal Retirement Planning Inc. “If you make an emotional decision where you sell everything or stop contributions, you will likely miss out on the recovery rally, which will significantly hurt your 401(k) portfolio.”
This is where the herding effect takes hold. When others around you are reacting emotionally, even experienced investors can feel compelled to follow. Financial media and social media can amplify that urge to act, creating the false sense that doing something is always better than doing nothing.
“Many investors claim they can tolerate a 20% to 30% drawdown on the way to higher returns, but when it happens, doing nothing can feel foolish,” explains Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors. “The key is recognizing that being prepared and sticking to a plan is not inaction; it’s discipline.”
In a 401(k) during a recession, this means not selling out of equity funds to sit in cash, but instead staying the course with the asset allocation you chose during more level-headed times.
Build a Strong Emergency Fund
During a recession, the risk of job loss increases as companies cut costs, slow hiring or restructure to manage economic uncertainty.
If this happens while the stock market is also down, some individuals may feel forced to make early 401(k) hardship withdrawals just to cover basic expenses. This is far from ideal, as these withdrawals come with potential penalties and taxes, plus the long-term cost of selling assets at depressed prices.
The simple solution is to build a well-stocked emergency fund. This should consist of cash held in a high-yield savings account and be large enough to cover six months to one year of essential household expenses, such as food, rent or mortgage payments.
“Maintaining liquidity outside of retirement accounts is critical, so you are never forced to sell depressed assets,” Schulman explains.
If your emergency fund is currently lacking or nonexistent, it may be worth temporarily reducing your 401(k) contributions until you’ve built a more comfortable cash cushion. It’s a balancing act, but having that safety net in place can help you avoid disrupting your long-term retirement strategy.
Increase Your Contribution Amount
One common mistake investors make is underestimating the value of their 401(k) plan, often prioritizing taxable brokerage accounts instead.
While those accounts offer more flexibility in terms of investment options and withdrawals, experts suggest that maximizing 401(k) contributions should be a top priority, especially during a recession.
“Take advantage of your full employer match,” Custovic says. “If you are not doing this, you are leaving money on the table at a time where you really don’t want to be.”
This becomes even more important when markets are down. During a recession, asset prices are generally depressed, so every dollar you contribute buys more shares of the funds in your 401(k) lineup.
“If your day-to-day cash flow allows for it, consider increasing your contribution percentage and work towards maximizing it each year,” says Mark Andraos, partner and wealth advisor at Regency Wealth Management. “If you have a long-term time horizon and the markets have sold off, why not consider adding more dollars each pay period and buy at a discount?”
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Find the Courage to Buy the Dip
Most 401(k) funds are broadly diversified by design. The majority hold U.S. and/or international stocks and are market-cap weighted across nearly all 11 stock market sectors.
It is important to understand that while a recession can slow down earnings and shake investor sentiment, it does not change the long-term fundamentals of a well-diversified fund.
A broad basket of global stocks may stumble in the short term, but over time, the collective growth of the global economy — driven by population growth, productivity gains, innovation and rising consumption — has historically pushed markets higher.
The stock market has survived events far more severe than a recession, from the Great Depression to two world wars, and it is still powering forward. There is little reason to believe this time will be any different. Buying during a downturn takes courage, but history suggests it is often the smartest move for long-term investors.
“Market downturns are the only time you get to buy future returns on sale,” Schulman says. “Continuing to contribute steadily to a 401(k) during a recession allows savers to accumulate more shares at better valuations and meaningfully boost long-term wealth,” he says.
Don’t Ignore Money Market Funds
A well-diversified 401(k) portfolio typically includes a mix of global stock and bond funds, tailored to your time horizon and risk tolerance. But many investors, especially during strong bull markets, tend to overlook the value of safer, lower-returning options like money market funds.
That is understandable. When stock markets are climbing by double digits year after year, holding cash-like investments can feel like leaving money on the table. But it is during recessions that these conservative funds prove their worth.
Barring extreme disruptions, money market funds aim to maintain a stable $1-per-share net asset value. They provide liquidity within your 401(k), allowing you to shift money quickly if market conditions change or better opportunities emerge.
With the current federal funds rate sitting between 4.25% and 4.5%, many money market funds are paying strong yields while acting as a buffer against stock market volatility. That combination of safety and income makes them a tool worth keeping in your 401(k) at all times.
And if you still feel too anxious to buy equities, a money market fund can serve as a good halfway point, helping you maintain your 401(k) contributions without watching your balance decline.
Write an Investment Policy Statement
An investment policy statement is a written document that outlines the goals, strategy and rules for managing your portfolio. Investors who work with financial advisors typically receive one as part of the process when handing over assets to be professionally managed.
This document serves as a framework for decision-making. It may include sections covering your target asset allocation, risk tolerance and investment goals. Think of it as the constitution that governs how your portfolio should be managed over time.
While a 401(k) might not come with a dedicated advisor to walk you through this process, there are plenty of resources available online to create a simple version yourself.
“Personal investors should create a simple investment policy statement for themselves, defining contribution schedules, rebalancing rules and triggers for portfolio review, so emotions don’t hijack their strategy during a downturn,” Schulman says.
An investment policy statement does not have to be perfect. The real value is that it is written during a calm, level-headed time and can be revisited during periods of stress. That structure helps you stay grounded and systematic rather than reactionary and emotional.
Rebalance Your Asset Allocation
If you had the foresight to allocate part of your 401(k) to bond funds or money market funds, a recession can present a prime opportunity to rebalance.
For example, suppose your original allocation was 70% stocks, 20% bonds and 10% money market funds. During the course of the recession, you check your portfolio and see it has shifted to 60% stocks, 25% bonds and 15% money market. This likely happened because stock prices fell, which reduced their relative weight in the portfolio, while bond and cash holdings held up better.
This kind of shift may prompt a rebalance. In this case, you could sell 5% each from your bond and money market positions and use the proceeds to buy 10% more stocks. That brings your portfolio back to the original 70-20-10 target allocation.
Rebalancing like this is a disciplined way to buy low and sell high. The timing and thresholds for when to rebalance — such as once per quarter or when allocations drift by more than 5% — should ideally be written into your investment policy statement to keep the process consistent and objective.
Stress-Test Your Portfolio
Stress-testing can provide the kind of objective, fact-based insight that helps calm nerves during a market downturn. It is a way to quantify the timeless investing mantras of “this too shall pass” and “this time is not different.”
Stress-testing works by modeling how your portfolio would have behaved during past market scenarios. It is a core part of risk management used by institutional investors like university endowments, pension funds and family offices, but is just as useful for individuals trying to assess how well their 401(k) might hold up during a recession.
The first variable to look for is your portfolio’s historical standard deviation. This measures how volatile your returns have been over time, usually on an annualized basis. Higher numbers mean wider swings, which may not align with your comfort level or ability to stay invested.
The second key variable is drawdown. This tells you the largest peak-to-trough loss your portfolio would have experienced and, just as important, how long it took to recover. This figure matters because a longer time spent in the red increases the likelihood that investors will panic and make poor decisions.
You can run these tests using free online backtesting tools by inputting your asset allocation. Some 401(k) platforms also offer built-in analytics that let you review performance scenarios and historical data based on the funds available, including how they performed during past recessions like 2008.
Remember, stress-testing does not predict the future, but it gives you a clearer picture of what to expect based on real data so you can prepare instead of reacting.
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8 Rules for Managing Your 401(k) in a Recession originally appeared on usnews.com
Update 04/21/25: This story was published at an earlier and has been updated with new information.
