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Copyright © 2020 Albuquerque Journal
Throughout his career, Ernie C’deBaca has been proactive when it comes to his 401(k) savings account. During his 36-year career at Public Service Company of New Mexico and in his current role at the Albuquerque Hispano Chamber of Commerce, he said he maxed out his 401(k) contributions when possible to boost his retirement options.
Now 66, C’deBaca said he was looking ahead to retirement on the horizon.
That is, until the recent market slide due to the new coronavirus threw a wrench into the works.
“There are unforeseen things that change in an instant, whether it’s your health and whether it’s your finances,” he said.
Since the market sell-off began in late February, C’deBaca said the value of his 401(k) declined by around 30%. Even knowing that the market goes through peaks and valleys, C’deBaca said he was surprised and frustrated by how quick the decline has been.
“It gives you pause. It makes you wish you had that crystal ball,” C’deBaca said.
C’deBaca isn’t alone. While stock prices broadly rose this week due in part to a massive federal relief package, stock indices remain well below where they were just a few weeks earlier. With millions applying for unemployment due to social distancing mandates, the possibility of more economic strife looms large for many investors.
Despite that, experts and hard data agree that your best bet is likely to stay the course – especially if you are not planning to retire within the next five years.
“Most likely, the best thing to do is nothing,” said Katie Taylor, vice president of thought leadership at Fidelity Investments.
However, Taylor acknowledged that the impact of the market’s volatility could have a bigger impact on those who have retired or plan to retire soon, and said those groups most likely should talk to an expert about their risk.
For longtime investors, the recent declines have conjured up memories of the Great Recession. But while that crisis brought steep stock market declines in 2008 and 2009, Taylor said investors were still better off sticking with their investments even through the worst of the recession.
“If you cash out on equity investments while they’re down … you’re buying those losses,” Taylor said.
Data from Fidelity showed that customers who sold stocks in their 401(k) plans saw their account averages grow 157% from 2008 through the end of 2017, while customers who stayed the course and kept their stocks saw 240% growth over the same period.
“Over time, we’ve seen that stocks do rebound,” Taylor said.
Manuel Montoya, associate professor of international management at the University of New Mexico, agreed with Taylor and said investors should avoid making rash choices in conditions of fear and uncertainty.
“You don’t ever want to make a market decision in those sorts of conditions,” Montoya said.
Taylor said Fidelity and other firms won’t know the extent of the impact on 401(k) plans until they finish tabulating numbers from the first quarter of 2020. Still, she said most workers are far enough from retirement that they don’t have much to fear from a short-term drop in stock prices.
Reilly White, an associate professor at the UNM Anderson School of Management, said the economy will likely go through several more boom-and-bust cycles before the average worker is ready to retire.
“This is a blip on the screen of your overall retirement potential,” White said.
Indeed, the recent downturn may end up being a blessing in disguise for younger savers.
Jay Shah, a 26-year-old digital marketing manager for Dreamstyle Remodeling, said his response to the downturn was to increase his contributions to his investment accounts. His logic is that he has a long time to go until he’s ready to retire, so it makes sense to buy when stock prices are low.
“At the end of the day, this is nothing but a blessing,” Shah said.
However, Shah acknowledged the situation is a bit more challenging for workers who are planning to retire within the next five years.
With a shorter timeframe, White said workers preparing for retirement may have to build up their cash reserves or delay retirement altogether.
Taylor added she would recommend that workers close to retirement take a close look at how much exposure to the stock market they have in their 401(k), and consider incorporating a higher percentage of bonds and other stable investments.
While Fidelity and many other firms offer tools to help members assess how much risk they’re comfortable with, Taylor said any worker contemplating retirement should get on the phone with a specialist to determine how to proceed.
“If you are getting ready to retire … that is definitely a sign that you should talk to someone,” Taylor said.