“The markets, they’re down again, and big time,” he said. “I thought you might call me shrieking.”
It’s true that market corrections and crashes make me crazy. I have, over the years, screamed when the markets tumbled. I’ve had some dark and worrisome days. I was a wreck during the 2008 financial crisis. The end of 2018 was frightful.
But, knowing what I know and writing about personal finance, I have never changed my retirement investment strategy in a panic. I’m sharing this because, as an investor, I’m also concerned about how this coronavirus outbreak will disrupt economies worldwide. So, let the frustration out. Scream if you need to.
“I’m losing $500 plus daily in the market, help!” one reader wrote. “I read your column, and it was very informative about not panicking and staying the course, but this is scary! I hope what [the] medical professionals said is true and that the coronavirus is like the flu and will pass, but when? I’m ready to take my money out and buy real estate instead! Thanks for letting me vent.”
With one question, I was able to calm this investor down. I asked: How old are you?
He’s 37 and investing for retirement in a 2050 target-date fund offered in his 401(k) plan. Target-date funds are designed to reduce an investor’s risk automatically as he or she nears retirement. The date for the fund this person is investing in means he’s planning to retire in 2050 — 30 years from now.
As I pointed out to him, he has time for the market to recover. Plus, if he stays with this type of fund, it will rebalance to reduce his exposure to equities the closer he gets to his retirement date.
“I guess I’m panicking because I want to live comfortable now,” he said. “I’m also trying to save money to buy a house, and I have a new baby (only 5 months), things like that.”
He certainly shouldn’t put money he needs in less than five years in the market — too risky. But he can let the retirement money ride. He doesn’t need to change a thing.
The World Health Organization’s warning about panicking concerning the spread of the virus applies to retirement investors, too.
“Our greatest enemy right now is not the virus itself,” said WHO Director-General Tedros Adhanom Ghebreyesus. “It’s fear.”
Early last week, I canvassed a number of certified financial planners (CFPs) and certified public accountants (CPAs), asking what they would advise investors as the market began to decline. At the time, the market was down more than 6 percent.
By Friday, things had gotten worse. The coronavirus outbreak pushed stocks toward the worst weekly loss since the 2008 crisis. I asked the financial professionals to address some of the concerns I’ve been hearing from readers.
Q: With further losses in the market, does your advice change that investors should remain calm?
Steven Podnos, a Florida-based CFP and physician: I have been advising clients to stay the course or to consider adding a little to their stock holdings.
Daniel Morris, a CPA in California: Prudence makes sense. Panic does not. It is definitely a time for some strong antacids, romantic comedies and fine wines.
Lynn Ballou, a CFP in California: Now that the market is solidly in correction territory, it’s important to set aside the time to review specific holdings in our portfolios in light of recent events, framing that review in terms of how we feel these historic times might impact the investments we hold. I typically don’t recommend switching up objectives and asset allocations due to fear or in the middle of what may be short-term volatility. However, that said, it might be wise while asset prices are suppressed to think about switching horses within asset classes or moving from a growth to a more value tilt. Doing so might create tax losses you can use this year or in future years while buying a similar asset we feel might perform better going forward. Since we don’t have clarity to see the future and know what day the markets will recover, I recommend replacing the holding being sold with another simultaneously so as not to inadvertently miss the buy opportunity by being out of the market and possibly end up overpaying later on. No tax losses? If you’ve been wanting to rebalance but have been put off by the large recent gains in the market, perhaps this is a very opportune time to switch up holdings since the tax bite is far less severe than before.
Doug Radtke, a California-based CPA: I advise investors to continue to stay calm but to make calculated and methodological adjustments to their portfolios. For those closer to retirement, defensive measures must be stepped up. Those five years away from retirement definitely felt the market drop and should start planning on rebalancing. Those further away from retirement shouldn’t panic, but I don’t think this is the end of the downturn. Nobody has a crystal ball on the market.
David Holland, a Florida-based CFP: No, the advice is exactly the same, and that is the point. Corrections are historically common. Something like every 12 months on average. Investors have been lulled into believing they are rare. Investors shouldn’t worry about the coronavirus any more than they do all the other things that can potentially affect today’s stock market: Middle East conflict, U.S. 2020 election, U.S. national debt, the trade spat with China and so on. A worried investor is often a bad investor. If someone is worried, they really need to take stock — no pun intended — and reassess their goals and risk tolerance.
Q: Is there anything that retirees should be doing?
Holland: If they are 100 percent in equities, they better be in a position to not need any of those funds for many years. Do they have a significant emergency fund? They better. Do they have ample income from Social Security, pensions and other fixed-income sources? They better. If a retiree doesn’t have a proper emergency fund and other reliable sources of income, then [he or she] should reevaluate overall allocation to equity versus more secure holdings.
Q: Experts suggest that you should have money set aside — three to five years’ worth of your income needs — that isn’t affected by roller-coaster swings in the stock market. Could you clarify what this means? Does this mean cash in a savings account?
Morris: I believe that 12 months should be in cash or cash equivalents — CDs, money markets, short-term bonds, etc. The remaining may be in a portfolio of liquid assets that would include equities, bonds, bank deposits, strategic metals — gold, silver, platinum, etc. Real estate, for example, would not meet this requirement, as its conversion to cash can be lengthy depending upon facts and circumstances.
Q: Is this a good time to take advantage of the market downturn and invest in equities?
Morris: In my view, the volatility still provides opportunities. Buying opportunities exist, as reactions are pendulums that swing too far in any correction.
Radtke: There is a great deal of uncertainty at this moment. For people employing a dollar-cost average buying method, this drop has opportunity, but for the average investor, I would not consider this a “fire sale.” There is just too much uncertainty at the moment.
Holland: The emotions are real. Here’s the thing: For every person who “feels” the need to sell because of this worry or that, there is another investor — reasonable, dispassionate, long-term in their thinking — who is quite happy to take the investments off their hands for a lower price. The dispassionate wins.
Ballou: For those who have been on the sidelines with cash thinking the markets are overpriced, it might be time to think about a buy strategy. I’d suggest careful research and thought into what investment selections can do best going forward, and perhaps developing a dollar-cost averaging strategy. In fact, when you think about it, most of us are already dollar-cost averaging into these markets with our 401(k) and other payroll-funded retirement plans. So careful attention should be paid to what’s in place and if any allocation changes are warranted.
After talking to all of these experts, I’m calmer, even though my retirement account is down about 12 percent. But if history is any indication, I’ll still come out ahead.
John, a retiree from Virginia who has been through a number of market corrections and crashes, said he’s not afraid, writing: “I’m near 80, always been in growth stuff, ‘suffered’ paper losses, bought more stuff, waited. And now, I am (almost) embarrassed at the value of our portfolios.”
As luck would have it, my husband and I were in the middle of a wealth management analysis with a financial adviser when the market took those heart-stopping dives last week. We’ve been doing this type of review every few years to make sure we’re on track for our retirement.
I reached out to our adviser, and he was reassuring, saying: “It is a big part of my role with clients to be rational and not emotional at these times. I can tell you, having done this for 25 years, when the sell-off comes, it always feels horrible and always feels like there is no bottom. It will pass, and it will feel bad until it does.”
Reader Question of the Week
If you have a retirement question, send it to email@example.com. In the subject line, put “Question of the Week.”
Q: At age 69 and after 20 years of marriage, I was suddenly left for a much younger woman. The problem is that I no longer have any credit history because it was connected to his bank account in the Netherlands. While I had a credit card in the United States, it was over 20 years ago. I now have no credit history in the United States. I own my own home, have a pension, get Social Security and have zero debt. How do I get a credit card in the United States?
A: It’s not as hard as some think to start building a credit history. If you’re trying to establish a good credit history, I recommend you get a secured credit card. Check with your bank or credit union to sign up for a card, or you can find a list of secured-card issuers at bankrate.com. Shop around to avoid cards with high fees, and make sure the issuer is reporting your history to the credit bureaus.
I recently helped my young adult daughter establish credit. In just three months of following my advice, she had a credit score of 737. Here’s the step-by-step advice I gave her.
Please join me at noon (Eastern time) on Thursday for a live discussion about your money.
Retirement Rants and Raves
Your thoughts: How are you dealing with the market plunge? Have you made any changes to the way you are investing for retirement? If you’re staying the course, do you have any advice for others? Send your comments to firstname.lastname@example.org. Please include your name, city and state.