Coronavirus fear is fever-pitched, sending stocks plummeting and 401(k) investors running for the hills. Here are three ways that investors can mitigate losses if we are indeed in the midst of a recession.
People saving for retirement are understandably freaking out as coronavirus fears affect the global economy. The stock market has plummeted for the sixth day in a row. The Great Recession of 2008 and 2009 that wiped out millions of dollars in 401(k) balances is still fresh in investors’ minds.
Those worries are sparking a flight to fixed income-based investments, as 401(k) holders try to make sense of the malaise.
Alight Solutions, the business outsourcing company that tracks 401(k) investments, found that trading activity at the beginning of the week surged as investors panicked and moved out of stocks.
When the stock market is in a steep and precipitous decline, retirement savers cash out of the market or move all their money to safe havens. But it’s not always the right move. Here are three steps you can take to mitigate your losses.
History has proven that panicking is not the answer. Take the financial crisis a little over a decade ago, for example. According to Fidelity Investments, the average 401(k) balance lost $30,000 from June of 2007 to the beginning of 2009. Boomers who continued to make contributions during that time frame saw their balances nearly triple by 2017.
The same goes for IRA holders. Boomers’ balances appreciated 68% by the end of 2016.
For 401(k) investors who were completely freaked out and moved their money to cash, they may have looked smart during the sell-off, but not so much a decade later. Fidelity found they never really caught up. Five years after the recession, one-quarter of those who unloaded their stocks haven’t reinvested. You don’t want to make the same mistake with the coronavirus.
Staying the course is the first course of action 401 (K) holders should consider during the coronavirus stock market rut, but it’s not the only one.
401(k) investors should consider evaluating the investments in their portfolio. Being overexposed isn’t prudent in the current market where talk of a recession is rising.
If there’s a heavy concentration of Asian stocks or multinational companies that have exposure to China some pruning may be in order. That doesn’t mean you should get too conservative. Stocks like Apple (NASDAQ:AAPL) will probably recover once the virus is contained. It’s not as if consumers will no longer want to purchase iPhones after coronavirus.
But it doesn’t mean you should be overexposed in one area of the market. You wouldn’t want to be overweight tech stocks when companies can’t get their hands on supplies from Chinese manufacturers. Vanguard predicts coronavirus could reduce China’s economic growth by 0.5 percentage points this year.
Staying diversified is equally important in tumultuous times. Diversification protects your retirement savings when markets go south. A diversified portfolio should be comprised of stocks, bonds, cash and alternative investments.
Within each category, consider spread out the investment dollars. If one stock makes up a large portion of your investment portfolio, the risk to your balance is elevated. Don’t think diversification helps? Fidelity found those with diversified portfolios saw declines of 35% during the financial crisis. All-stock portfolios experienced a 49.7% dip.
Above all remain calm. Vanguard reminded investors this week that volatility is “more the rule than the exception.” Events that prompt steep sell-offs tend to recede, leaving little impact over the long haul. As the coronavirus bloodletting continues, these are words to live by 401(k) holders.
Disclaimer: The above should not be considered trading advice from CCN.com.
This article was edited by Aaron Weaver, Sam Bourgi.
Last modified: February 28, 2020 9:07 PM UTC