WHAT SHOULD I DO WITH MY 401K RIGHT NOW?
The swift drop in the stock market from all-time highs into a bear market has left investor’s heads spinning. Almost before anyone had time to fully process the fall, the market started to rebound. Down 30%+ from the peak, the stock market started to recover and as of the beginning of May was only around 15% below the all-time high in February.
Good and bad headlines continue to alternate in the news. Historic unemployment numbers, better than expected results due to people socially isolating, infection hot spots popping up due to delayed action, and general unease and uncertainty about how long it will take for things to return to normal.
So, what should investors expect for the future and more importantly what should they do about it? With regards to both the coronavirus and its impact on the economy and the stock market: Is the worst behind us or are we in store for more bad news before we start to turn the corner? I can’t answer these questions, but I can provide some advice for how to prepare your finances for the future.
Take stock of your personal finances
First things first, do what you can to make sure your day to day and month to month expenses are covered. If you are lucky enough to have a stable income coming in at this time, now is the time to review your emergency savings and make sure it is adequate. Most financial advisors recommend between 3-6 months of expenses, but the ultimate number is whatever allows you to sleep soundly at night. If your employment situation is shaky or uncertain no one is going to razz you for having 9 months’ worth of cash in a savings account right now.
If you are in an industry that has been hit hard by the effects of the coronavirus shutdown and you have or are in danger of losing your income, now is the time to prepare. The stimulus and increased unemployment benefits from the recently passed CARES act can help build a savings buffer, and federal student loan deferred payments may help some as well. If you are worried about missing payments for rent, your mortgage, or other essential services, reach out to your landlord, bank, or creditor before you’ve missed a payment to understand what options you may have for credits or deferral.
If you feel secure about managing your cash flow then you can move onto the next level and consider what to do about your retirement investments.
Continue your 401k contributions
If your personal finances are locked down, you are able to continue working, and have an income coming in, then the right answer for almost everyone is to continue making your contributions as normal. No one can predict with any certainty if March was the low point for the stock market this year or if the worst is yet to come. During these times of market stress, our fight or flight instincts start to kick in and it can feel like you have to do something. But reacting based on your gut is rarely the right move and you should instead listen to Richard Bogle: “Don’t do something. Just stand there!”
If you are in the early or middle stage of your career and still have a while to go before retirement then this is likely not the last time you will experience a market drop of 30% or more. This is just another example of the volatility you will need to live with to enjoy the returns that come with owning stocks, as well as an opportunity to buy them at a lower price than you could just two months ago. It’s better to focus on your time in the market rather than timing the market.
If your company has cut matching 401k contributions because of worries about the economy you might want to review the available investments in your 401k and if they are high fee or otherwise don’t meet your needs you could shift your contributions to an IRA or Roth IRA. Just set a reminder to turn your 401k contributions back on when your company begins offering a match again.
If you are able to increase your contribution, now is probably a good time to do it. Market crashes hurt while they are happening, but they do increase the forecast for future stock returns.
Create a Financial Plan
If you have a financial plan in place, now is the time to review it and reassess some of your original assumptions. Were you optimistic or pessimistic regarding your emergency fund, too conservative or aggressive in your asset allocation and risk tolerance, were you focusing on the right goals?
The steady upward market climb during the past decade had the effect of lulling investors into a false sense of security, where every time the market dropped a few points investors started to scream “BTD!” (that’s “buy the dip!” for those of you who aren’t a part of fintwit). We haven’t seen it for a while, but the market can remain lower and decide not to hit new all time highs for a lot longer than we’ve experienced recently.
If you don’t have a financial plan now is the time to put one together. As the saying goes, the best time to plant a tree was 30 years ago, the second-best time is today. The same sentiment applies to financial plans. The best time to put together a plan was in the middle of the 10-year bull market we just experienced, the second-best time is today.
Consider your risk tolerance and asset allocation. If you were invested 100% in stocks or in an 80/20 stock/bond portfolio, how do you feel? If you were comfortable with the volatility and the drop in your portfolio’s value then that’s probably the right allocation for you. If, however you had some sleepless nights, it might be a good time to reconsider the level of volatility you can live with. The stock market will probably not be as rosy as the period from 2009-2019, so you need to make sure you can handle volatility when it comes. Some of the worst financial decisions happen when investors’ emotions get the better of them.
Another option is to get some help from a financial advisor as you put together your financial plan. One of the biggest benefits from working with an advisor is having an experienced person to talk to and help guide you toward what the right decision is for your specific situation and then help you stick with it.
With social distancing and stay-at-home orders in effect, many advisors are adding the ability to meet virtually with clients, while some have been working virtually with clients for years 😉
Have questions about your specific situation?