As of March 2020 when this article is being written, we’re dealing with an unprecedented health crisis. Our personal lives are being affected in a myriad of unexpected ways. It is understandable that most of us probably feel anxious and unsure about the future.
The daily news has raised fear in investors, and the disruptions to our daily lives have changed the way we’re spending our money. But when it comes to saving for your future, it’s more important than ever to keep a clear head.
You may be tempted to stop funding your retirement account, move it to something very conservative, or cash part of it out. But before you make any rash decisions, take a breath and remember: One of the best things you can do right now for your retirement is to stay the course for the long term.
Noted investor Warren Buffet saw this over 30 years ago when he described two “super-contagious diseases” that will forever have occasional outbreaks: Fear and greed among investors. As he famously stated as a strategy against this “disease,” people should “…be fearful when others are greedy and be greedy only when others are fearful.”
Although too simplistic to be construed as Buffet’s recommended investment strategy, his point is well founded. It’s all too common for investors to bolt when things go poorly.
And at the moment, fear is ruling. That’s why it’s more important than ever to be as rational as you can about your investments during this trying time. Getting some perspective can help you get there.
History is our teacher
Failing to recognize the dangers of letting your emotions drive investing decisions can be disastrous when your life savings are at stake. To understand what effect moving assets out of equities during a volatile market such as the 2008 recession has on account returns, in 2017 Fidelity took a poll of their investors and found that those who continued to contribute to their 401(k) plans between June 2007 and June 2017 benefited from, on average, a tripling of their account balance. For the average baby boomer, the account balance in their 401(k) plans was $115,000 in June 2007, fell to $85,000 at the beginning of 2009, and rose to $315,000 by June of 2017 (Forbes).
Admittedly, it can be difficult to look at a significant drop in your investment portfolio. But if, for example, you stayed the course during the 2008 recession, you were rewarded with an over 11-year bull run. Consider that fact in light of today’s market.
Further, stock market corrections happen more than you probably realize. Over the past 70 years, the benchmark S&P 500 has undergone 37 corrections of at least 10%, not including rounding (Yardeni Research). Stock market corrections usually run their course quickly, and you may profit much more by keeping the long-term view in your sight. (Past performance does not guarantee future results.)
Careful about getting too conservative
It’s understandable if the market volatility makes you feel like you want to go with more conservative investments or even pull out of your mutual funds all together. But know that while that may shield you temporarily, those alternatives have a risk as well—the risk that the rate of inflation will outpace the rate of return on your investments. For example, putting all your savings into cash would leave you exposed to erosion in its value from inflation. Younger people would find it extremely difficult to accumulate meaningful savings. Retirees would shorten the number of years they could cover their retirement expenses, as they still need exposure to stocks and bonds to maximize their nest egg.
Money invested in a fixed-income product like the Prudential Guaranteed Account (PGI)* with Member Benefits may provide investment stability, but it also limits earnings. If you choose to invest entirely in the PGI, you lose the ability to earn as much as you may have been able to if you had invested more diversely in stocks.
Mike Driscoll, Managing Director of Sheridan Road and an Accredited Investment Fiduciary, has 40 years of experience and a lot of knowledge in the financial industry. Mike is also a longtime WEA Member Benefits advisor, and has personal work experience with the PGI. He explains, “The guaranteed fund from Prudential provides stability in periods of market disruptions. Because the fund does not invest in stocks, it allows investors to minimize the impact of volatility in the equity markets. However, the fund is not designed for short-term trading, but for long-term stability of a portion of an investor’s account balance.”
Keep these things in mind: If you’re a younger person, time is on your side in terms of the market and your future ability to generate income. If you’re older and closer to retirement, you may want to be more conservative with your investments—but don’t miss out on the potential earnings of stocks and bonds. Delaying Social Security is another option. It may be a good time to revisit your spending goals and budget so you know exactly where you stand today.
Creating a well diversified portfolio appropriate for your personal situation is important and may help you with market volatility. How to determine what is appropriate is based on factors like your age, your goals, your time horizon (when you need to use the money you invest), and your emotional tolerance for risk.
Don’t try to time the market
Emotions and deeply ingrained biases influence our decisions every day. They are also deeply rooted in personal experiences that influence our decision-making. But they can cause us to behave in irrational ways. Especially in times of uncertainty, investors tend to make investment choices based on emotion rather than careful consideration of their long-term plan. “It’s tempting to sell stocks or cash out your retirement savings when things look shaky, then buy again when the outlook is bright. But trying to time the market almost never pays off because no one really knows what will happen next, even in these challenging times,” says Brenda Echeverria, Financial Planning Supervisor at Member Benefits. “Moving out of your investments into cash or very conservative investments means you may lose any opportunity to recover your losses when the stock market rebounds.”
Mike explains that Nobel Prize-winning psychologist Daniel Kahneman demonstrated this emotional tendency with his loss aversion theory, which demonstrates that people feel the pain of losing money more than they enjoy gains. Our natural instinct is to flee the market when it starts to plummet, just as greed prompts us to jump back in when stocks are skyrocketing (Capital Markets Group, How to Handle Market Declines, March 2020). Adds Mike, “Emotional reactions are normal when events that impact us seem beyond our control. You wouldn’t be human if you didn’t fear loss. But keep in mind that both (instincts) can have negative impacts on your finances.”
Right now, many people are trying to time the market by moving their funds around. There are risks and limitations to this strategy. For one, most investments, including several offered by Member Benefits, have trade restrictions that place a limit on short-term trading. Those who make too many trades within 30 days of purchase could find themselves put on “roundtrip restriction,” which bars shareholders who employ this tactic from making trades for a certain number of days.
If you are in the PGI and participant level protections (PLP) become active, it could limit the outflows from the account. Although PLPs do not apply to benefit responsive withdrawals (such as retirement income), if triggered, they do restrict withdrawal activity. Remember, PLPs are there to protect the account and account holder. For more information on PLPs, please see our article, Protecting a legacy.
If you are considering cashing out your retirement funds temporarily and putting them in the bank, know this: Doing so may make you subject to taxes—and you may be limited in coming back to your retirement program. Also keep in mind that the PGI offers a higher interest rate than a bank.
You have a unique advantage
As a Wisconsin public school employee, you have an advantage that many do not—the Wisconsin Retirement System (WRS) pension plan. This gives you a foundation of retirement income you can’t outlive.
Keep this in mind when you’re reading articles about the market and the COVID-19 crisis. The general population these articles are referring to are in a different situation than you are. It’s like comparing apples to oranges.
If your WRS pension and Social Security are taking care of a substantial percentage of your living expenses, you may not need to be so conservative with your 403(b) and IRA accounts. But of course, everyone needs to make the best decisions based on their own situation, investment objectives, and risk tolerance.
If you want a more in-depth review of your savings strategy, contact us for a complimentary consultation. You may find yourself investing too conservatively, not conservatively enough, or you may just have questions and need some guidance. Visit our financial consultations page. Or if you have questions, feel free to call us at 1-800-279-4030. Our staff is still available to help you from 7:30 a.m. to 5 p.m. Monday through Friday.
*Interest is compounded daily to produce a yield net of Prudential’s administrative fee of 0.60%. PRIAC is compensated in connection with this product by deducting an amount for investment expenses and risk from the investment experience of certain assets held in PRIAC’s general account. For more information, go to weabenefits.com/pru. This is not an offer. Securities can be offered by the prospectus only. For more information and to access the prospectus, go to weabenefits.com/investments.
Stay on course
Investors who have been willing to ride out the volatile returns of stocks over long periods of time generally have been rewarded with strong positive returns. A long-term investment strategy offers a balanced approach to both risk and reward. Best practices associated with long-term investment strategies often include the following:
- Keep a long-term focus and don’t try to time the market.
- Spread out your risk.
Diversifying, or putting your money in different types of investments, has long been recognized as an effective way to manage your risk. In theory, when certain types of investments are declining in value, other types are gaining value. A well diversified portfolio can lessen the impact of market volatility. (Diversification does not protect against losses or assure a profit.)
- Know your risk tolerance and invest accordingly.
- Utilize dollar cost averaging.
If you continue making regular, ongoing contributions to your retirement account, when the market falls you will be able to purchase more shares of a mutual fund for the same dollar contribution. It’s like buying when the market is on sale. The last thing you should do is stop contributing—it’s like skipping the sale on school supplies and waiting for them to go back to full price before buying. (Dollar cost averaging does not assure a profit and does not protect against loss in a declining market.)
- Save early and save more.
Contribute as much as you can to your savings plans as early as possible to get the full benefit of compound interest. Compounding happens when earnings on your investments are reinvested in your account. The reinvested earnings may also have earnings, and then those earnings are reinvested and so on.
- Rebalance your portfolio as needed.
- Investigate investment options.
We have a variety of investment options available to suit your needs. Take our investor suitability questionnaire to find out what investment style may be best for you. Then review our investment strategy options.
- Take advantage of Member Benefits’ expertise.
Investing involves market risk, including the loss of principal.