Coronavirus, Retirement and 401(k) Accounts: What Investors Should Know And What They Should Do

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There are two types of investor. There are those who, like me, check stock index futures before our first cup of coffee in the morning and just before we go to bed, having tracked the market all day. Then there is the far more common breed, those who track the performance of their 401K or brokerage account only through the total value stated in their quarterly statements.

Those people may not follow the market closely but I’m sure most of them listen to the news, so will, no doubt, have heard breathless coverage of historic losses in the stock market. They will be expecting some really bad news over the next couple of days as those statements arrive, but in many cases, it won’t be as bad as feared.

From the close of the last quarter of 2019 to the close of the first in 2020, the period that those statements will cover, the S&P 500, a broad index of big companies’ stocks, is down almost exactly twenty percent. The more focused Dow Jones Industrial Average lost a little more than that during the same period, around twenty-three percent. That doesn’t mean, however, that everyone’s 401K will have lost a fifth of its value.

Unless you are just starting out on your working life, and therefore have a relatively small amount invested, it is highly unlikely that you are one hundred percent invested in stocks. If you take the advice that is available to most people, or if your retirement funds are invested in a “target fund,” you will have some of your money in bonds (maybe called “fixed income” on your statement) as well as stocks, and the older you are, the higher that percentage will be.

That practice of diversification is precisely for times like this.

Over the last quarter, bonds have generally done a lot better than stocks. Long-term government bonds, as measured by an ETF that tracks them (TLT) actually gained nearly twenty-two percent. Corporate bonds (this time using the ETF LQD as a guide) have not done as well but have lost less than four percent. Most bond portfolios will fall somewhere in between those results.

If we make a conservative assumption that your bond investments will have been flat over the quarter, and that your 401K investments are sixty percent stocks and forty percent bonds, your statement shouldn’t be anywhere near as scary as the headlines would have led you to believe. The sixty percent of your account that is in stocks should be down twenty percent and the forty percent in bonds should be flat.

That means that a $100k account will have dropped to $88k. That obviously isn’t good news, but nor should it be panic inducing. If you have a higher percentage of stocks in your account you will have been hit harder that that, but that also means that you will have done better in the previous five or ten years, when the S&P 500 was gaining significantly. Bear that in mind if that is the case.

So, if you shouldn’t panic, what should you do?

The answer to that question is somewhat counterintuitive: You should, according to the theory, be selling some bonds and buying some stocks.

If you have a portfolio split between stocks and bonds, the quarterly statement you receive this time around will show the value of that diversification. It only works properly, however, if you do what is required by another part to the theory.

Over time, the percentages of each asset class that you own will change as the values change. To keep them in line you have to make adjustments regularly. If stocks have gained more than bonds, as has been the case over the last decade or so, you need to sell some stocks and buy bonds. Right now, the opposite is true. Your fixed income holdings probably amount to a higher percentage of your account than targeted, the stock less. To adjust back, you need to sell some bonds and use the money to buy stocks.

If your 401K is invested in a target fund or some other balanced investments that seek to maintain a set ratio between stocks and bonds, the fund will do that automatically. If you tried to replicate that strategy yourself by buying some stock and bond mutual funds or ETFs, you will need to do it yourself. Either way, though, don’t overthink it.

If you are looking at an overall loss in your account of around twelve percent in the worst quarter in stock market history, the theory of holding a diversified portfolio has worked. Don’t panic, do what you are supposed to and understand that as big a setback as this is, unless you were planning to retire very soon (in which case you should have a much, much higher percentage of bonds in your account anyway) you have time to recover, and this, too shall pass.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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