Target funds are passively managed, which means nobody is sitting there trying to buy the bottoms and sell the tops, which is what we call actively managed funds. Not having anyone to constantly babysit them is what makes passively managed funds less expensive than actively managed in terms of expense ratios.

Target funds tend to consist of other passively managed index funds that provide broad market coverage and whose objectives are none other than to mirror the performance of a wide range of securities in a particular asset class.

If your friend’s 401k suffered a 50% loss in 2008 and did not recover on the way back up, that means either your friend panic-sold, your friend was in a (very poorly) actively managed fund, or (most likely) your friend is full of shit.

Regardless, I would recommend not taking financial advice from your friend.

To answer your question, as long as you hold passively managed index funds, you do not have to worry about someone “selling your stocks if the economy tanks.”

Work colleague crystallised their losses during the GFC by selling their 401k and changing the asset allocation to Cash.

They didn’t convert it back to stocks until 2018…

I worked with a fellow once who said something to this effect right after the market went down during the pandemic. He said something like “I lost $50k yesterday”, and I asked him “oh really? Did you sell a bunch of stuff? If you still have it it’ll go back up eventually”.

He said “No I didn’t sell anything, but in 5 years everything is going to be lower than if the market hadn’t gone down”.

That take is also wrong. As you can see in this graph, things bounced back, and in general continued on the same trajectory.

Just like there was a sharp decline, there was also a sharp increase. Without the decrease, the increase wouldn’t have happened, so the fellow I was working with was wrong, because his take would have meant the sharp increase would have happened even without the sharp decrease.

It depends on who is managing your money and what their investment strategy is. So many people, including “experienced money managers”, treat the stock market like it’s a blackjack table. Trying to capitalize on the rise and fall of stock prices which are often driven by investor enthusiasm; or lack thereof. They’re like dust in the wind.

“Buy low sell high” is a great slogan but a lousy investment strategy. Investments are a long game. When you, or whoever is managing your 401k, buys stocks they’re using your money to buy ownership in a business. Diversification, not having all your investments in one stock or even one industry matters. Long term viability of the businesses you invest in matters. Investing in good, sustainable business that are not overvalued (meaning the stock price exceeds the book value) matters.

You want someone managing your money who does their research, understands what they’re investing your money in, and knows that when stock prices go down, it’s the best time to pick up more good investments at a discount. Not to panic and sell everything. That’s almost always a losing strategy.

That said, Lots of 401k’s are invested in index funds which have a detailed investment strategy that the broker handling your 401k should be able to provide you with a copy of.