As the stock market falls in response to the spread of Coronavirus, it can seem incredibly rational to move your 401k and other investments to the sideline. If you’re like many people, your instincts say to shift the balance from stock funds into the cash fund “until things get better.” As humans we are emotional by nature and panic is a natural response as fear continues to fester amongst investors. But is “cashing in” your 401k account the right move?
The Prudent Response to Not Cash In
According to Louis S. Harvey, the answer is “No.” In the last 35 years there have been 10 periods of market crisis that resulted in 70% of lost returns. The “prudent response” was to continue investing as prior to the disruption as history shows quick recoveries.
What is needed now is not panic selling, but perspective and patience.
For some perspective, this is not 1929, 2001 or 2008 for two very important reasons:
- Government appears to be erring on the side of overreacting, not underreacting to the crisis. The recent passage of a $2 trillion stimulus package is historic.
- The Federal Reserve has shown it has learned from the previous major crisis and is not afraid to act. In the words of Wells Fargo strategist Christopher Harvey, “The Fed took the kitchen sink and threw it at the market. Then it took another kitchen sink and threw it at the market.”
Patience is required to understand that markets have always recovered from crisis, both small and large. It doesn’t happen overnight, but every bear market has recovered to see stock market indices reach new all-time high levels.
Proactive Steps to Take With Your 401k
Rather than panic, Magellan Financial suggests these proactive steps:
If you are saving for retirement but not close to retirement:
- Continue saving as normal in your company retirement plan.
- Look at tactically tilting your portfolio, overweighting areas of the markets that have been most effected.
- If you have job stability consider increasing your contribution rate to take advantage of the market selloff.
If you are saving for retirement and close to retirement:
- Continue to save as normal in your company retirement plan.
- Review your investment and retirement plan with an experienced investment planner to make sure you are still on track to reach your retirement goals. No plan? We can help.
Adjust your savings and Asset Allocation based on your updated investment and retirement plan.
Living in Retirement Lessons
There is never an all-clear signal in bear markets (nobody rings a bell). As investors we need to be brave and overcome those natural fears that come with market disruptions. Prudent investing requires the patience and perspective to stay invested through both the good times and the bad times.
Preparing for unexpected – but common – retirement events such as a sharp market decline is one of the key lessons of good retirement planning. Sensible strategies like having an emergency fund, diversifying your investments, and ensuring that your retirement can help you prepare for most contingencies.
Have no plan or need help with your investment and retirement plan? Not sure if your current portfolio matches it? Contact us for successful investment management!