“The stock market can do well even when the economy seems to be doing poorly,” said Dan Egan, managing director of behavioral finance for Betterment.
As we close out 2020 — thank goodness — I asked some financial experts what lessons retirement investors should learn from a stock market that left people feeling jet-lagged from the market turbulence this year. Here’s what they had to say.
Christine Benz, director of personal finance for Morningstar:
1. Put your retirement plan on autopilot. For people who were investing through regular paycheck deductions in a company retirement plan, 2020′s short-lived market crash was a nonevent. Data suggest that most 401(k) investors didn’t flinch during this period, and that illustrates the virtue of putting in place a good, hands-off system. That way you don’t have to worry about what to do during periods of volatility.
2. Play a good defense. Research on brain functioning demonstrates that it’s next to impossible to think long term if you’re worried about your short-term well-being. And 2020′s first quarter provided a vivid illustration of this, as many workers experienced job losses just as the market was tanking. To be a successful long-term investor, it’s crucial to have enough liquid reserves set aside to carry you through unexpected events, whether a job loss or large medical expenses. That way you’ll never be in the position of needing to raid your long-term investments when they’re down. Holding three to six months’ worth of liquid reserves is a good benchmark for most people, but those who should target an even bigger cushion include older employees, highly paid workers, contractors, or those who earn their living from the gig economy. These workers should aim to save a full year’s salary of liquid reserves.
3. It’s not too late to invest in stocks. Investors who read headlines about the strong gains notched this year by the major markets might assume that they’ve missed the boat. The good news is that, at least until recently, only a fairly narrow segment of the market was increasing, while everything else didn’t perform nearly as well. That suggests that investors with stocks in their portfolios should make sure they have well-balanced exposure, not just famous technology names like Apple, but also some value-oriented and non-U. S. stocks that still have plenty of room to grow.
Carolyn McClanahan, a certified financial planner who founded the fee-only Life Planning Partners based in Jacksonville, Fla.:
1. Everyone needs an emergency fund. This keeps you from tapping into money that can be expensive to use, such as credit cards, retirement plans and the sale of assets.
2. You need a plan. People need an investment policy on how much to allocate to certain riskier assets (stocks, real estate) and safer assets (bonds, CDs, and cash). By sticking to your allocation during times of market upheaval, you are less likely to sell out of the market in fear, which is what many people did during the market downturn in March. And they paid dearly for this mistake.
3. Invest in yourself. What 2020 taught us is that even the most recession-proof jobs can be challenged in some circumstances. Some people think their jobs are recession proof. Health-care workers are one example. The critical-care workers continued to work but those in medicine who were not critical suffered cutbacks. By investing in yourself and keeping skills sharp, it makes it easier to pivot to alternative work to create an income.
Ric Edelman, founder of Edelman Financial Engines:
1. There’s more to life than money. Covid showed us how unpredictable and fragile our lives are. Let’s use this lesson to be sure we’re living the life we want to live focusing on health, family, career, home and community.
2. Respect other perspectives. Covid showed us that our lives are far more connected to each other than we realized. Let’s live our lives in an inclusive, not exclusive, manner.
3. Ignore predictions. With thousands of people offering predictions, it’s likely that one of the predictions offered by one of them will come true — but it will be due to sheer luck, not brilliance, skill or talent. And the person who got it right last time will probably be wrong next time.
The stock market took us on a bumpy, scary ride in 2020. So, here’s what these experts said you should expect in the new year:
“As much as we’re all relieved to have a vaccine, and return to normalcy is on the horizon, I wouldn’t rule out that 2021 will feature some market jolts along the way,” Benz said.
Benz said this makes it especially important that investors match their portfolio to their spending horizon.
“Investors who are getting close to retirement should consider reducing risk in at least a portion of their portfolios,” she said. “When they do eventually retire, they will be able to spend from their safe investments, cash and bonds, if stocks encounter a period of turbulence.”
Still, keep in mind the very low yields on safe investments, Benz added, pointing out that, “even retirees need the growth potential that comes along with stocks; they can’t afford to settle for very low returns that may even be negative once inflation is factored in.”
I’ll leave you with this from Eric Bronnenkant, head of tax for Betterment, for what to do in 2021.
“Be strong,” he said. “Maintain focus on long-term goals and ignore stock market noise.”