How Does the Coronavirus Affect Your 401(k)?
On March 9th, 2020, many Americans started the day wondering how, and if, the Coronavirus (COVID-19) pandemic would affect their 401(k) plan. As panic continues to spread further, the financial markets have been experiencing extreme volatility, which caused a market-wide stock trading circuit breaker to be triggered for the first time since 2008. Per the SEC market volatility regulations, the stock trading is halted for 15 minutes once the S&P 500 Index drops below 7%.
Let’s explore what effect the Coronavirus pandemic and the pandemic’s influence on the market will have on your 401(k) plan.
What is the Cause of the Market Volatility?
Without an immediate COVID-19 vaccine, the popular safeguard for citizens across the world has been self-isolation. Italy, for example, has essentially quarantined over 16 million people. Professional conferences are being canceled. Professional athletes are playing games in empty arenas and stadiums. A former presidential candidate has self-isolated after encountering a COVID-19 carrier.
With so much fear and isolation, general commerce is grinding to a halt and the markets are responding in kind. The latest is the collapse of the oil markets due to the drop in demand and increase in supply because Saudi Arabia and Russia decided to go “scorched earth” in a pricing war.
How Does all This Affect My 401(k) Plan?
401(k) plans are long-term investments that are intended to be used during retirement by replacing the income that you had during your working days. The primary investment vehicle in 401(k) plans are mutual funds which are pooled investments and already diversified with hundreds of individual stocks, bonds and commodities. Diversification is key to an investment portfolio as it will protect yourself from individual corporation risk (think the Enron debacle).
When you are looking at a retirement horizon that’s 10, 20, or 30 years in the future, stocks will provide you with the greatest rate of return opportunity over the long-term. The S&P 500 Index inception date is 1926 and has an annual average return around 10%. That span includes the Great Depression and 13 subsequent recessions. Investing in stocks is always going to include peaks and troughs, but with the increased risk comes an increased of a potential rate of return.
The one mistake 401(k) participants make that will do irreversible harm to their nest egg is to make an emotional decision and sell your stock holdings at the bottom of a market. That action would lock in losses and not allow the opportunity of a rebound.
If you are within five years of retirement, we recommend you work with a financial professional such as a Certified Financial Planner (CFP) to evaluate your investment strategy.
Action Steps
It is entirely possible that the end is near for the longest bull market in U.S. history which began on March 9th, 2009. Since World War II, there have been 12 bear markets that have lasted for an average of 14.5 months. When it comes to your 401(k) plan, the goal is still the same:
1. Continue saving to build your nest egg as you now can buy stocks cheaper which will lesson the impact of your overall portfolio through Dollar-Cost-Averaging.
2. Remember that a 401(k) plan is a long-term investment vehicle to replace your income during retirement. The stock market will continue to ebb and flow on a year-to-year basis, but has trended upward over the long term.
3. Be diligent and make sure that the fees you are paying for your 401(k) plan are not exorbitant. A low-cost 401(k) plan will put you in the position to keep more money in your account and is even more important when the market is not performing. As a rule of thumb, 1% of additional fees during your lifetime could be robbing you of 10 years of retirement income.
There certainly is an unknown future with the COVID-19 pandemic. Some things will remain unchanged though, such as the IRS will still collect taxes and individuals will continue to want a dignified retirement. Whether you are a participant in a small business 401(k) or an institutional investor, the best thing you can do during this pandemic is to not panic, and if you have questions, contact your financial advisor. After the largest bull market in U.S. history closes, Wall Street will do what it has done 12 times since World War 2……..start another bull market.
