How to Protect Your 401k from a Stock Market Crash

Are you riding your retirement on the success of the stock market? If so, it’s understandable that you’re worried about what a crash could mean for your 401k.

If that’s you and you’re wondering how to protect your 401k from a stock market crash, I’ve got good news for you:

You don’t have to worry.

The stock market is volatile, but you can minimize that risk with the right investing strategy.

If you invest your money the right way, you can not only protect your retirement but also experience even greater returns so your retirement can be even sweeter. I’ll show you how to take advantage of stock market volatility, which includes a stock market crash, so you can profit from the fluctuations instead of watching your portfolio take a plunge.

Are you with me?

How A 401k Works

A 401k is a retirement account available through your employer. You can have a traditional 401k or a Roth 401k, both of which are tax-advantaged investment accounts.

The Problem With a 401k

Now, I’m not the biggest fan of 401ks for a couple of reasons.

For one, they afford you practically ZERO control over your investments.

If you do have any sort of control over where your money goes, it’s usually limited to which fund to choose from. Funds are baskets of stocks that typically don’t even beat the market when it comes to returns. Plus, they normally have high fees, which means you not only make less than you would make if you invested on your own but you’re also charged a fee on your investments.

The problem is that you can’t invest in individual stocks through a 401k, and as Rule #1 investors know, investing in individual stocks of incredible companies is the best way to make returns on your money.

So, that’s my beef with 401ks. They restrict the type of investments you can make so you miss out on the opportunity to choose investments that are more profitable. However, that doesn’t mean they are bad. A 401k has its benefits too.

The Benefit of a 401k

The largest benefit of a 401k, and the only reason I say it is worth your time, is the employer match. Most employers offer to match your contribution to your 401k up to a certain percent. That is FREE money. And you should never walk away from free money. The power of the match is that it can double your investment.

If your employer matches your contribution to your 401k, you should invest up to the point of the match.

How To Protect Your 401K

So you have a 401k and are taking advantage of your employer match and you’re wondering “how to protect my 401k from a stock market crash”.

Most advisors will tell you to leave your money alone and ride the waves saying, “eventually the market will recover and so will your investments”. But this could be devastating for your retirement if you don’t have much time left in the market.

If you could prevent the loss in value that comes with a stock market crash by getting out at the right time, and getting back in when the prices are low, wouldn’t you want to?

While timing the market will never go perfectly, you can experience greater returns if you use the right tools.

Use Indicators

Indicators are data-driven tools that can signal when you should exit your positions and when you should re-enter. If you run them on your investments on a month-to-month basis you can be sure to be out of the market somewhere near the top and back in somewhere near the bottom.

This is no joke. People who use these tools saw great returns in their 401k relative to those that followed the standard advisor's advice to leave their money alone.

Why Indicators Matter More in a Volatile Market

In today's environment of elevated inflation, global instability, and rising interest rates, market volatility has become more frequent and more dramatic. This is exactly when relying on objective indicators — rather than emotion — becomes critical. Rule #1 Investors use three indicators, but even basic momentum indicators like moving averages or MACD can help you avoid massive drawdowns.

For example, during the 2022–2023 bear market, many Rule #1 students using these indicators were able to exit their 401k mutual funds before significant drops — preserving capital and re-entering at lower valuations. That’s the power of following data, not headlines.

🧠 Pro Tip: Use indicators on a monthly timeframe to avoid the noise of daily swings. Back-test them on your existing mutual funds or index holdings to see how they would have performed in past crashes like 2008 or 2020.

Adjust Your Allocation

If you are nearing retirement and will need cash soon, it is a good time to re-evaluate your investments.

Look to your investments that are nearing their intrinsic value and consider selling. Anytime your life and goals change, is a reason to take a closer look at what you’re invested in and if it makes sense to sell.

You may want to consider putting some of that cash into short-term bonds, which although won’t give you great returns, will give you more than you’d get if it were sitting in a savings account.

Consider a 401k In-Service Rollover

If you're over 59½, many plans allow you to perform an in-service rollover — moving a portion of your 401k into a self-directed IRA without penalty or tax consequences.

Why is this powerful? Because now you can invest in individual companies aligned with Rule #1 principles — companies you’ve researched and understand — instead of being stuck in high-fee mutual funds.

Ask your 401k provider or HR rep if your plan allows this. It's a critical step for those approaching retirement who want more control.

Where To Put Your Money Before The Market Crashes

If you think the market may crash soon, what do you do? This is where I suggest you put your money before the market crashes to be in a safer spot and protect your retirement.

Get Into Cash

A stock market crash is a golden opportunity for Rule #1 investors. It opens the possibility to get bargain prices on truly incredible companies. BUT… it’s only available to those who are ready with a watchlist of wonderful companies and with cash to buy.

If you suspect a market crash is coming, having cash on hand to react when it does is key.

Once you get into cash, you need to be patient and wait for the companies on your watchlist to go on sale. When they do, you’ll be ready to buy.

Remember, you’re not trying to time the market, you’re trying to get a great deal. So, don’t wait until you think it hits “bottom”, if it’s priced at 50% off its true value, it’s already a great deal.

IRA or Roth IRA

Your 401k isn’t the only investment vehicle available to you, and it definitely shouldn’t be the only one you use. Once you’ve met the amount your employer will match in your 401k account, open up a self-directed retirement account such as a traditional IRA or a Roth IRA. These are also tax-advantaged investment accounts, but the beauty is you can buy whatever you want.

With an IRA or a Roth IRA, you have more control. You can invest in individual stocks and actually buy companies that align with your values.

This is a great place to put your money before the market crashes so you can have the opportunity to buy individual stocks when they go on sale.

Maximize Contributions While You Can

Contribution limits change year-to-year based on inflation. As of 2025, you can contribute up to $7,000 to a Roth or traditional IRA if you're under 50, and $8,000 if you're over 50. Use this opportunity to max out contributions during high-income years while tax advantages still apply.

Be aware that Roth IRA income limits may phase you out depending on your income bracket, so consult a tax advisor.

Money Market Account

A money market account is another investment vehicle that you should consider using if you are serious about investing. While retirement accounts have limits on the amount of money you can contribute each year, money market accounts do not.

With a money market account through an investment bank such as Fidelity or Charles Schwab, you can control how much you invest, what you invest in, and withdraw funds whenever you need to.

This can be a great addition to your 401k or IRA and a great place to put your money before a stock market crash so you are ready to invest.

Why You Don’t Have to Be Afraid of a Stock Market Crash

As I mentioned earlier, a stock market crash can be a golden opportunity to buy great companies at great prices and make incredible returns.

Even Warren Buffett has said it’s best to look at market fluctuations as your friend rather than your enemy.

You can do this both in your 401k, or self-directed retirement account, and in a money market account. Keep in mind, you won’t be able to buy individual stocks when they’re on sale in your 401k, but you can still take advantage of the low prices and buy when others are running in fear.

Here are a few more tips to help you navigate a stock market crash:

Stay Calm

It’s impossible to time the market perfectly. When the stock market crashes you will experience a dip in the value of your investments. The best way to avoid making any rash decisions and the best way to stay calm at this time is to avoid looking at your balances.

Remember: Volatility is normal and your job as an intelligent investor is to not let it toy with your emotions. Don’t look at your accounts during a market crash and you’ll save yourself a lot of heartache and potentially from making any poor decisions.

Be Patient

I can’t say this enough, a stock market crash is an opportunity to buy amazing companies on sale. And this opportunity doesn’t come around very often. If you’re patient, though, the time will come and you’ll be ready to act.

So, do your research and be prepared with a list of companies you want to invest in. Then, wait for the right price and buy. This is a sure way to experience success even in the midst of a recession.

Be Prepared

Most of us have 401ks, and that’s not a bad thing. A 401k can provide you with the opportunity to invest, and to invest with free money! That being said, if you want to be prepared to invest during a recession or a stock market crash, you need to utilize other investment accounts such as self-directed retirement accounts and money market accounts so you can buy individual businesses.

Trust me, you will end up much better off in the long run by choosing your own companies instead of putting everything into a 401k, where you don’t have the same potential.

If you want to learn more about how to survive a stock market crash and protect your retirement while you’re at it, check out my Stock Market Survival Guide. You’ll learn everything you need to know, plus how to get started investing in individual companies, which is the best way I know to grow your wealth over time.

One Final Thought: Don’t Waste the Crash

Most people fear market crashes — but Rule #1 investors embrace them. The greatest transfers of wealth happen in downturns because prices drop far below intrinsic value.

What sets you apart is preparation. By building a watchlist of wonderful companies now and holding cash in a money market or self-directed IRA, you're poised to buy when others are fearful, just like Buffett recommends.

Don’t waste the next crash — use it to build long-term wealth.

**Editor’s Note (Updated April 2025): This article was originally published in 2021 and has been significantly updated in 2025 to reflect current examples and Rule #1 investing insights.