The stock market, like anything else, has a life cycle – peaks and valleys and highs and lows. Changes in interest rates, international trade negotiations or treaties, news headlines that dramatically shape investor’s behavior and or global events that threaten economic stability can all have a monumental effect on the world’s global economy. The financial insecurity that many are feeling right now during these trying and uncertain times is not new. It’s important to remember that we have been here before. In fact, there have been 14 different times throughout recent history (beginning in 1907) that the country has experienced a recession.
Some of you might recall the 2001 recession which lasted 8 months. Caused by the Y2K scare, companies bought billions of dollars of software fearing that systems weren’t prepared for the transition from the 1900s to the 2000s. Then again in 2008-2009, we experienced ‘The Great Recession’ which lasted for 18 months and ended when the government introduced an economic stimulus package. Time and time again we bounced back and this time is no different, the ‘crisis’ will pass.
However, this time is a little more unique in that we are now practicing social distancing, travel has come to halt, students (both college and K-12) are e-learning, celebrations have been canceled or postponed and many are in self-quarantine or sheltering-in-place. Uncertainty, anxiety and fear are commonplace. We will get through this. Remember to keep perspective and think long term.
As I mentioned earlier, the market naturally goes through cycles. A ‘bear market’ is defined as a decline of 20% or more. These are normal parts of the investment pendulum – what goes up will certainly come down. And although this time of uncertainty is frightening and many of us may be feeling unstable, there are a few tactics you DO NOT want to execute at this time:
1. Do not panic and start selling
It’s important to remember that investing is a long-term strategy. One of the ways to weather a storm is to make sure you have a sound financial plan in place – one with specific goals, a retirement date and an asset allocation strategy. By creating a retirement financial plan in which you feel confident, you are less likely to be reactionary in the market. During anxious and stressful times, it is common for folks to make quick, snap financial decisions. Resist the urge –it’s easier said than done but make smart long-term business decisions not emotion-based decisions.
2. Do not check your balance portfolio every day
If you look at your portfolio every day, you are more apt to trigger an emotional response. Resist the temptation. Look at it once a month or just quarterly. If you keep staring at the balances going up and down every day, it’s more likely that a bad decision will be made.
3. Do not cash in your 401(k)
Leave your 401(k) alone as long as you can. However, due to the extreme hardships inflicted on families by COVID-19, the government signed the CARES Act, a $2 trillion economic stimulus package into law in late March. Aimed at providing temporary relief for retirement plan sponsors and their participants, eligible individuals can make a coronavirus-related withdrawal of up to $100,000 from your 401(k) if you or your spouse/partner was diagnosed with COVID-19 or if you are experiencing financial hardships as a result of being quarantined, furloughed, laid off, working reduced hours, or being unable to work due to childcare closures. Also, required minimum distributions (RMD) from 401(k)s and other retirement plans have been suspended for 2020. This will provide a significant tax break as individuals can leave the tax-deferred money intact and not pay taxes on the distribution in 2020. These stipulations are in place to help those who are currently facing tough financial burdens. For others, reduce spending where you can and use your 401(k) only as your last line of defense.
When the market is on a down slope, there are a few things you shouldn’t do but there are also some proactive steps you can do with your financial portfolio:
1. Keep calm and keep your emotions in check
As mentioned above, stay away from the naysayers. Negativity and fear only breed emotion-based financial decisions.
2. Take advantage of dollar-cost averaging
This is an investment strategy in which the total amount to be invested is divided amongst a period of time thus reducing the impact of a volatile market. The purchases occur at a regular set of intervals regardless of the share price. This removes the impulse to try and time the market. And, if possible, increase your 401(k) contributions, especially if your employer offers a significant match.
3. Make sure your plan is diversified
Another suggestion is to spread your money across a wider range of fund types which may help reduce the impact during a market decline.
These are shaky times for all of us. You have worked hard to develop a strong retirement plan – one that will suit your needs during the next phase of your life. By understanding the life cycle of the market, you will be better equipped to not let emotions cloud your decision-making process. Stay the course, know you will survive this ‘crisis’ and keep perspective.