Staying the Course
Global stock markets are down over 30% and a recession is all but inevitable. Coronavirus news is dominating all the headlines and your IRA and 401(k) market values are down dramatically from where they were just a month ago. What to do now?
The worst mistake that investors can make at times like these is to overreact. Sometimes the best reaction is no action at all. Here are some helpful tips to navigate what is likely to be an extended period of volatility and ensure long-term success in financial markets.
- Check your liquidity – IRA’s and 401(k)s are fantastic ways to save funds for retirement due to their inherent tax advantages. However, they are not good sources of primary liquidity except for those already in retirement. Early withdrawal penalties and income taxes can devastate investors who pull funds from an IRA or 401(k) before age 59 1/2. Before putting money into a 401(k) or IRA you should build up ample emergency funds in a checking, savings, or money market fund.
- Set an appropriate asset allocation - Once you have your primary liquidity in order, maximizing contributions to a retirement account is a great way to build your nest egg. But how do you invest the funds you set aside? There is no easy answer as every individual has unique circumstances. We recommend you speak to a financial advisor. Please let us know if you would like to speak to a member of the LCNB Wealth Management team. Here are some of the things you will want to consider:
- Liquidity – If you are already in retirement you will want to invest in assets that provide for liquidity. Otherwise, this should not be a major focus of your retirement accounts.
- Time Horizon – How long do you have to invest? Investors with longer time horizons have the ability to take on more risk as investments will have time to recover after inevitable periods of volatility.
- Goals – What are your retirement goals? How much do you need to accumulate in order to maintain your desired lifestyle? Financial planning is a good way to make sure you are setting aside enough for retirement.
- Risk tolerance – How will you handle periods of volatility? Stocks and mutual funds that invest in stocks can be especially risky. The higher risk also leads to higher returns over time for investors willing to stomach the ups and downs of the market. Risk adverse investors will want to avoid high allocations to risky asset classes.
- Stay the course – It is important to remember that recessions are a normal part of the business cycle. Long-term investors should expect to experience multiple recessions during their lifetimes. Stock market selloffs of 30% or more are normal in a recessionary environment.
Hopefully, you have done a good job with points 1 & 2 above and you were prepared for this volatility. Avoid selling or taking unplanned distributions from your retirement accounts during periods of volatility. Trying to time the market can be one of the worst mistakes an investor can make. Rebalancing or tweaking your allocation can be a good strategy during times of upheaval. However, you should consult a financial advisor before making any major changes to your asset allocation.