Whenever there’s a hint that recession is on the horizon, the markets react. In the case of coronavirus, many parts of the economy are grinding to a halt. That has sent stocks on a rollercoaster of drops and gains including the worst market day since Black Monday in 1987.
How should you respond with your 401(k) and other retirement accounts? If you’re wondering what to do, try to stay calm and remember that the nation will recover. In the meantime, keep reading to learn how to manage your 401(k) during this trying time.
What started with canceled flight reservations quickly spiraled to an economy-wide slowdown. Closed businesses, canceled sporting events, and increased isolation are leading to somewhat predictable results. People are spending less. While it may sound like a good thing, this means a recession could be imminent.
It’s been a long time since the U.S. experienced a serious recession. Many people in their 20s were not working yet when the Great Recession struck in 2007 and 2008. As adults, the recession experience may be more challenging than the last time around when you were still in school.
Some businesses, like Amazon, streaming services, and consumer staples companies that make toilet paper, will experience a boom in demand. Most, however, will see lower demand. That will lead to lower revenues and lower profits for small companies and multinational enterprises alike.
When companies make less money, financial markets tend to fall. As has already been seen, that can lead to a nauseating rollercoaster ride as markets rise and fall. When you know what to expect from the markets during a downturn, it’s easier to manage the ride.
What markets do during downturns
The U.S. is not a stranger to economic uncertainty, sudden stock market drops, and financial crisis. While the United States just had it’s longest Bull Market (positive market trend) in history, what goes up has come down.
Major downturns in the U.S. go back to before America’s founding in 1776, with the Credit Crisis of 1772. Other major crashes and financial events have taken place over a dozen times since.
There are several types of market drops, though they have historically always led to the same long-term result. Here are some terms to know and scenarios you should expect to see during market uncertainty:
A market pullback happens when asset prices drop 5% to 10% from a recent peak price. Pullbacks often happen a couple of times per year and are not a huge concern among long-term investors.
A correction happens when the stock market falls by 10% from a recent high. Corrections are somewhat common.
If stock prices are a bit too inflated but things are still on the right track, a correction is like a speedbump that slows the market down.
A Bear Market means stock prices are down at least 20% from recent highs. Stocks officially hit Bear Market territory when investors began to take in the full potential impact of the coronavirus.
A recession is a period of economic decline that lasts at least two consecutive quarters. You can’t officially declare a recession until at least six months in, but odds are Americans are experiencing a recession right now as trade, spending, and other economic activity slows.
If you’re wondering what to do when the stock market goes haywire, look to the cover of the fictitious “Hitchhiker’s Guide to the Galaxy,” which says in big bold letters: Don’t Panic.
Millions of investors follow their instincts to sell when the markets go down. The problem with that is they often end up selling when the markets are low and don’t own the stocks when the market recovers. Follow these two rules to avoid a big 401(k) mistake.
Keeping a long-term focus during short-term volatility
It doesn’t matter if your portfolio drops 20% if you plan on retiring in 20, 30, or 40 years. If you owned 10 shares of a stock before prices fell, you still own that 10 shares today. Chances are the price will be down for a while, but will come back up in the long-run.
According to the numbers, the S&P 500 returns around 10% per year in the long-term. While there have been some very good years and very bad years, the average is most important for long-term investors.
Don’t sell at the bottom and miss out on future gains
Don’t sell at the bottom. Warren Buffett says you should be investing when others are worried and worried when others are overconfident. Don’t sell when prices go down. You should only sell when prices are high.
Again, you probably won’t need your 401(k), IRA, or Roth IRA for a long time. Don’t worry about what the stock market is doing today. Keep on investing steadily and you should come out ahead in the long-term.
If you’re worried about managing your own retirement account during these turbulent times, you should look into blooom. blooom is an app that checks your retirement account portfolio for unnecessary fees and to make sure it’s optimized for your needs.
Warren Buffett’s advice is solid and reminds us to keep on investing. If you buy when the market is down, it’s like buying those stocks on sale. When the economy eventually warms back up, diverse, long-term investors will reap the benefits.
Don’t put your investments on pause and certainly don’t sell 401(k) investments when the market is down. Just wait it out and enjoy the big gains on the other side.