For many of you reading this, you might be experiencing your first significant (and scary) drop in the value of your retirement savings. Even for others, a bit longer in the tooth, this recent stock market free-fall due to the pandemic is enough to rattle even the most experienced of investors, myself included. In times like this, after watching a sizable piece of your portfolio temporarily melt away, it is perfectly normal to want to question everything. Moreover, many people might be feeling a strong desire to change something…anything, if it will help their critical retirement savings. In the next few minutes, I will set forth a very simple 3-step plan that you can take action on right now!
The right balance for YOU is the key
One of the most important decisions you can make as an investor, from both a Risk and Return perspective, was/is your decision to invest in an appropriate balance between stocks and bonds inside of your retirement account. Striking the right balance of stocks and bonds is critical because this sets the stage for the vast majority of the return (growth) you should expect over time, but also the amount of volatility (ups and downs) you will experience with your account, specifically during times like this. Historically, stocks have provided much higher returns than bonds have, but bonds have demonstrated much more price stability than stocks. In other words, over time stocks have made investors much wealthier, but along with that wealth generating potential, have come many many sleepless nights!
So, in order to determine the right balance of stocks vs bonds in your account, you really need to assess the following two inputs.
How old are you and when are you planning to retire? Knowing this will set the stage for how long you have to invest your retirement account. This is important to know because your ideal stock to bond mix will differ quite a bit for someone that is 35 vs 55 years old. Generally speaking, the younger you are, the higher allocation to stocks you should have. Why? Because you need the growth in your account over time (which stocks have historically provided) in order to amass enough of a nest egg to one day be able to live off these savings in retirement. Conversely, as you near retirement and get closer to needing to live off your retirement savings, it makes sense to have some of your account in bonds and even cash, which don’t fluctuate in value like stocks do.
What is your tolerance for risk when it comes to your retirement savings? This one is a bit tricky. You see, your risk tolerance is something that really shouldn’t change on a day to day basis. Your risk tolerance is really part of who you are as a person. It is part of your unique personality. Assessing someone’s risk preference (tolerance for risk) should ideally be done in calm waters and not in the heat of battle. I have found that if you ask most people questions about risk with regard to their investments when the stock market is chugging along, making newer and newer highs – most people will salute the flag of stocks and tell you that “yeah sure, I can handle all the ups and downs the stock market may throw at me – bring it on!” But then, that exact same person – asked those exact same questions in the midst of a 4-alarm fire in the stock market like we are experiencing right now, will answer 180 degrees differently. “This is my retirement savings, I cannot handle this kind of drop!” And therein lies the problem. Your preference for risk (or volatility) in your retirement account should not fluctuate like the market itself. In other words – you can’t have your cake and eat it too! You can’t be aggressive when the stock market is good and flip flop to conservative when the market drops.
Ok, so all this is fine and dandy but what should you do RIGHT NOW? We can’t change the fact that the market is now down by roughly 30% from its month-ago highs and we have no clue what the next few months will look like. So the question remains – what can you do right now, specifically with your retirement account?
Acknowledge the fact that you are concerned, maybe even scared, and possibly even panicked. If I can play Psychologist for a moment – let me just say that those emotions you are experiencing are perfectly normal. It is OK to feel that way and there is absolutely nothing wrong with you.
Try your darndest to NOT make knee-jerk, in-the-moment emotional decisions with something designed for the very long term – like your retirement savings.
Take back some small modicum of control in an out of control environment. Reach out to your financial advisor and ask them if your retirement account is still appropriately invested (from a risk standpoint) after all this recent carnage in the markets. Or, if you have been going it all alone with your retirement savings, I strongly encourage you to take 5 minutes and use blooom’s free tool for a check-up on the health of your account today. At no cost, this will very clearly and easily tell you if you have the appropriate balance of stocks vs bonds in your account. From there, you will be able to determine if any action is needed. Then, and only then, will you be able to put emotions to the side and have a clear, un-obstructed view of where things stand today.
THIS is our why
We started blooom 7 years ago with the sole purpose of bringing badly needed financial advice and management to the massive number of American retirement savers that have been left behind by Wall Street and largely forced to going it alone when it comes to their retirement savings. Now, more than ever before, I am so proud of what blooom is doing for clients in this time of crisis. THIS is why we exist.
Chris Costello is the co-founder and Chief Investment Officer at blooom, a digital investment advisor for retirement accounts. Chris is a Certified Financial Planner and has been managing retirement accounts and working with clients for almost 25 years.