What to do with 401(k) right now? Should you change investments as stocks plunge amid coronavirus fe
U.S. stocks are expected to freefall when the markets open Monday, following an overseas selloff when an oil price war added to coronavirus fears across the globe.
The fast plunge triggered what’s called a circuit breaker for the New York Stock Exchange, which temporarily pauses trading.
As of 8 a.m., the Dow Jones Industrial Average, the S&P 500 and the Nasdaq were all poised to open nearly 5% lower than Friday’s close.
Meanwhile, the yield of the 10-year Treasury continued to fall as investors looked for safety, momentarily reaching a new low of 0.318% overnight.
So it looks like last week’s roller coaster ride of 1,000 point swings is back.
When will the stock market’s volatility end?
No one knows, and anyone who says otherwise isn’t being honest.
The conventional wisdom — to stay the course, to wait out the volatility — isn’t easy as you watch your 401(k) balances tumble.
But it’s still good advice.
Let’s begin with some history.
On March 9, 2009, the bear market of 2008–2009 hit its low, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.
Take the S&P 500, for example, which had a low of 676.53. That’s when the new bull market started, Kiely said.
On Feb. 19, 2020, the S&P 500 hit 3,386.15, a more than 400% gain over 2,754 trading days, he said.
“To say we were past due for a bear market — a 20% drop — or a correction — a 10% drop — is an overstatement,” he said.
Now bring in the coronavirus, something we have never faced before, and the climate was right for nervous markets to react.
“The media hype made investors panic and the market dropped 13.4% in a matter of days,” Kiely said, before stock futures plummeted overnight. “What we have to remember is when the market falls very fast, it usually recovers very fast. I suspect the market will swing wildly for a while.”
IF YOUR STOMACH IS FLIPPING
It’s a mistake to change around your portfolio because of your emotions, financial planners say.
We’d hope your portfolio was designed with your risk tolerance — how much risk you’re willing to take — in mind. Making a reactionary change can lock in losses that right now are only on paper, and you could miss out on a recovery.
So do nothing?
Yes, do nothing.
Before the overnight action, a correction was already underway with the S&P 500 down more than 10% from its all-time high, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.
“Doing something now is like putting on sunscreen after you already got a sunburn,” Maye said. “No need to make temporary losses permanent by selling at the wrong time.”
As trite as it may sound, staying the course is probably the best strategy, agreed Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.
She said while market corrections are hard, if one truly has a long-term perspective, history argues for sitting tight and riding out the ups and downs.
“In the past, back-to-back market declines have been associated with major disruptions such as the Great Depression, the oil crisis in the 70s and the burst of the internet bubble,” she said. “In those cases, the ensuing years of market performance more than made up for the decline.”
Even if your brain says to stay invested, your stomach may be another story.
If you’re uncomfortable with the volatility, it’s time to reassess your strategies.
In good market times, everyone has a high tolerance for risk, Kiely said. In bad times, that high tolerance goes low very quickly.
“What investors should do is wait for the inevitable recovery and then they should have a conversation with a friend, their spouse, their financial advisor or even with a mirror,” he said. “They should ask how they felt during the crisis, how do they feel now and do they want to make any permanent changes to their portfolio.”
IS IT SMART TO REBALANCE?
Financial advisors say you should rebalance your portfolio a few times each year to make sure you stay within your intended asset allocation.
For example, if your goal is to have 30% of your portfolio in U.S. large-cap stocks, and now with losses, large-caps only make up 25% of your portfolio, you would buy and sell to get back to your initial allocation.
Rebalancing is a smart strategy if done systematically and with well thought out thresholds, said Deva Panambur, a fee-only planner with Sarsi, LLC in West New York and an adjunct professor of personal finance at Montclair State University.
“If you rebalance more often, then in the long run it mitigates risk but may not add or may even detract from long-term returns," Panambur said.
But rebalancing now, when the market is so unsteady, may be a mistake.
Mott said rebalancing should not be a knee-jerk reaction to wild swings in the markets.
“At this juncture, the volatility is so extreme that more harm than good could be done by trying to reset portfolio weightings to a prescribed percentage,” Mott said. “While the market isn't going to send an engraved invitation with the right moment to rebalance, there is something to be said for holding off until there are some signs that the coronavirus has hit its peak.”
TAKE ADVANTAGE OF THE MARKET
While the advisors we talked to say people should stay in the market, for some, it could make sense to sell some positions to take advantage of what’s called tax loss harvesting.
If you have stocks in a taxable account that are under water — meaning you paid more than the position is currently worth — you can sell at a loss. The losses can offset any capital gains you have in the future.
“If the investor has no realized capital gains this year, they can offset up to $3,000 against ordinary income and any unused capital losses can be carried forward for federal income tax purposes,” Maye said.
Just make sure you understand the so-called wash sale rules. That means you can’t buy the same security or one that’s substantially similar within 30 days, Maye said.
For example, if you sell the Vanguard S&P 500 index mutual fund for a loss and simultaneously buy the Fidelity S&P 500 index mutual fund, you violate the rule and wouldn’t be able to take the loss.
If you already have cash on the sidelines, this could be the time to make a move.
“Historically, epidemics such as this have been good buying opportunities,” Panambur said.
You might find certain stocks or funds have taken a big hit so you can buy in at lower prices. Think of the airlines, hotel, cruises and other tourism industries, for example.
Another consideration is mortgage rates.
If you haven’t refinanced your home in recent years, rates are incredibly low for a 30-year mortgage, Maye said. Look around to see how much of a lower rate you can get in today’s market.
Have you been Bamboozled? Reach Karin Price Mueller at Bamboozled@NJAdvanceMedia.com. Follow her on Twitter @KPMueller. Find Bamboozled on Facebook. Mueller is also the founder of NJMoneyHelp.com. Stay informed and sign up for NJMoneyHelp.com’s weekly e-newsletter.