We were probably overdue for a stock market correction, but coronavirus has hastened it. Many people made bad financial investment decisions in the last recession and I am writing to remind us what lessons experts and experience guide us to do — and not do — as the stock market plunges.
First, pause with gratitude if you have a retirement account. Only 41 percent of older workers have any type of retirement plan at work, whether it is a traditional pension or a 401(k) TIAA- type plan. The rate of non-coverage is even higher for younger workers. And the rate of non-coverage is increasing fastest for highest income workers.
If you don’t have a retirement plan this is a good time to start one if you can, because it is a good time to buy investment assets. It’s also a good time to up your contributions if you are able to. As I told Reuters news service last week, those who stopped or lowered their retirement contributions in 2009 lost out. Basically, they were “selling low and buying high.” The workers who were able to keep investing and ride it out came out ahead in the end.
Second, know that in the 2008 recession, workers who did not lose their jobs (and most didn’t), and did not have to withdraw from their retirement accounts to pay basic bills, were back to where they had been in about three years.
Although it is hard to know what kind of reset we are in for, it’s important to remember how frightening the last stock market collapse was. As I have written before the morbid joke about the Great Recession of 2008 was that it turned Americans’ 401(k)s into 201(k)s. Indeed, the nation’s 401(k)s and IRAs lost about $2.4 trillion in the final two quarters of 2008. It looked bad. Those aged 30-50 had a median return of -30%. Over half of people over age 60 with 401(k) and IRAs lost more than 20%.
But those who bought stocks through their retirement plans in 2008 – 2009 did well. There were bargains in equity markets. The S&P 500 fell 39% in 2008; it then rose 24% in 2009 and another 12% in 2010. If you bought at the low in 2008 and held steady you made double digit returns upwards of 20%.
Here are a few dos and don’ts at a moment that is reasonably worrisome.
1. Do stay the course. “What course?” You ask. You should have a balanced portfolio based on the number of years you are going to work and your risk tolerance. Get a “money” notebook and write down your wealth portfolio allocation as it is today. You can’t manage what you can’t measure. If you have a portfolio goal of, say, 50% stocks, 30% bonds (including annuities), and 20% “other” (like home equity and alternatives), you may want to shift your allocations because you are probably underweighted in stocks. What is the right allocation? If you are twenty years from retirement, most experts advise you to take more financial risk and have more stocks than if you are older. If you have less time to retirement, be more conservative. I like to include Guaranteed TIAA annuities. I am not offering financial advice — the right action for you depends on your liquidity needs, other sources of wealth and income, and your tolerance for risk — among other things.
2. Don’t look at your retirement plan too often and don’t seek too much advice. Studies show consistently that people who check their accounts frequently trade more frequently. As a result, they tend to buy high and sell low compared to people who rebalance once a year. Evidence suggests that people who are open to advice and have neurotic traits are especially vulnerable to this tendency.
3. Do consider putting a greater share of future contributions into stock purchases to rebalance your portfolio and take advantage of lower costs. You will only want to invest in indexed funds. TIAA has a number of them and Vanguard is famous for them. I repeat: please don’t play the market yourself and only buy indexed funds.
4. Why indexed funds? Because they have the advantage of preventing you from fiddling. Fun fact: Humans have a bias for action. Doctors tell men not to get a prostate cancer screening because it is inaccurate and a high result will mean patients will want to take non-healthful drugs or have surgeries, even if inaction is the best idea. The protocol for a high PSA reading was always “watchful waiting,” a phrase that sounds too passive! So, physicians renamed the protocol. Now it is “Active surveillance.” That is my financial advice too: “active surveillance.” It doesn’t mean never taking action, should action be called for. For example, I just rebalanced and will buy more stocks with my future contributions. If you are an academic, go to TIAA, Click “Actions,” see “Retirement Plans,” Click “Change your Investments” and see your options.
5. Do reconsider talking to your “guy,” as in “I have this guy” (sometimes not a guy) “who gives me good financial advice. He is a friend of my uncle” (or whatever). This person is called a “conflicted advisor.” Your conflicted financial advisor is not good for you and they are likely not a very good investor themselves. Evidence suggests that those who give free advice through friends and relatives also manage their own money poorly. Most conflicted advisors remember your birthday and are charming, extroverted, salespersons who know they are conflicted. Get a non-conflicted, fee for service professional, a person who is paid to accept fiduciary responsibility. Here is an academic resource ; here is a consumer-oriented resource from Dana Anspach, a financial writer who I trust. And here is the website for the national association of fee-only advisors.
6. Don’t refinance your mortgage for more years. You want to make sure you are never in a situation you have to sell stocks to pay a mortgage when you or a family member loses a job, hours, or gig in a recession.
7. Do go to Human Resources and start saving the legal maximum in your pension– for most people it’s about $19 to $25,000 a year – or as much as you can afford. Only 4.6 out of $140 million taxpayers get the maximum tax advantage for saving in retirement accounts. Only 5% of employees do. Human Resources will celebrate your joining the elite club of maxers.
8. Do get a flu shot.
9. Do wash your hands.
10. Do comfort the anxious and the sick.
Most economists, me included, expect that a recession is already underway. Depending on how quickly Congress and the President move to extend paid sick leave, get spending power into the pockets of households, and liquidity to businesses so they don’t shutter the recession, it doesn’t have to be as bad as the last recession of 2009.
There are many great ideas about how to do this. States could get federal money to keep all teachers and school employees on the payroll, increases the amount of all tax refunds and credits for of all households by income, give restaurant gift certificates for eating later.
I have never said this before in my academic and adult life — but retirement is not our main worry now. Your retirement savings should be undergoing healthy hygiene: save, rebalance, don’t trade too much. But right now, do all you can to stay healthy and take care of your family and our community.
Flatten the curve.
Teresa Ghilarducci is Bernard L. and Irene Schwartz Chair in economic policy analysis in the Economics Department at the New School for Social Research
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