Investors have been panic selling lately as the coronavirus is pushing the global economy into a recession. Markets are very volatile, and it’s hard to tell where they’re headed.
Financial advisers generally encourage you to reserve at least a small part of your income for your retirement savings, ideally 10% to 15% .
While it’s normal to be worried about the coronavirus, investors should keep making contributions to their 401(k) or another similar retirement plan.
Peter Palion, a certified financial planner in New York, thinks there’s no point in stopping contributions if you have enough cash:
If you’re still getting a paycheck, what’s the point of stopping contributions to get a little more cash? It’s not like your cost of living is going up – your mortgage and utilities, are, for the most part, still very close to amount you paid last month.
Plus, you may not have as much extra money as you would expect to when you stop making contributions, as you will get a higher tax bill. You also miss a matching contribution from your employer, which is basically free money.
You should put retirement planning on pause during the pandemic only if you need the money right now for your expenses or if you don’t have an emergency fund with three to six months’ worth of expenses.
An emergency fund will be handy if you get sick or lose your job. But you should consider contributing again as soon as possible.
What we learned from past recessions is that investors who stopped making regular contributions and sold stocks left them further behind than those who stayed the course.
A study from Teresa Ghilarducci , Director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research, showed the negative impact on those who stopped or decreased their contributions during the recession of 2008-2009. People who got out of the markets were selling low and buying high. We need to do the opposite to make money.
After the Great Recession, 64% of high-income workers and 56% of low-income workers saw their accumulated retirement savings increase.
People who stayed invested did better. That’s because when you sell stocks to miss the bad days, you also miss the good days.
When you are out of the markets, you will always wonder when’s the right time to get back in. But nobody knows when is the right time. So, you can miss important gains if you try to time the market.
Investing in the stock market usually requires a long-term approach. If you don’t need your money before ten years, you have time to regain your losses. Those losses are just on paper and you only realize them when you sell your investments.
History has shown that, when stocks go down, not panicking and doing nothing is generally the best thing to do.
A market crash might actually be a good time to buy stocks, as they trade for a bargain.
Warren Buffett always says that you should be fearful when others are greedy and be greedy when others are fearful. Buying the market dip could be rewarding.
If you haven’t looked at your asset allocation in a while, it’s a good idea to review your portfolio to ensure it’s diversified enough. Ultimately, the appropriate allocation will vary depending on your age and risk tolerance.