At FMP, we put a lot of focus on employee wellness, having both a Wellness Committee comprised of employees and a reinforcing commitment to offering benefits that focus on the whole person. With this orientation, we consider financial wellness to be a significant part of that conversation and our wellness-related programming. To that end, we invite our long-time fiduciary advisor to FMP multiple times each year to provide unbiased financial wellness information to employees on a variety of financial subjects including budgeting, saving for large purchases, loan repayment strategies, and trusts and estates. In light of everything happening in our economy and financial markets, I thought it would be a good idea to chat with Dan Bender, CPA/PFS, CFP (the fiduciary advisor to FMP’s 401(k)) and Kurt Johnson, CFP, CPFA from PBMares, LLP to get their perspectives on what our employees (and everyone else) should be thinking about right now. Both Kurt and Dan were kind enough to answer a variety of questions I had for them on how to invest during this crisis:
We are bombarded every day with bad news and amongst that bad news seems to be, mostly, bad news about the financial market. Should I just sell the stocks I have in my account until things go back to normal?
Selling stocks now would be like closing the barn door after the cows have already run off. Your stocks are worth less than they were six weeks ago. Selling those stocks won’t fix that problem. Eventually, the stock market will recover. Focus on what you need to do to take full advantage of the recovery when it eventually happens. If investing in stock made sense for your financial plan six weeks ago, it still does today. Focus on the fundamentals of investing. Have a financial plan and an investment philosophy, invest in a diversified manner, and do not deviate from that plan when the economy or the market gets in trouble.
I heard that the S&P 500 had the worst month in its history since 2008, but I also heard that it had the best three days in its history since 1933, how does that happen? What does that mean to me as an investor?
These kinds of historic market movements happen because markets are efficient, and people are not. The market efficiently delivers information to people about the economy and corporate performance. People use that efficiently delivered information to make inefficient and emotional decisions, and as a whole they frequently make different and conflicting decisions. These decisions drive demand on both the buy and sell side of the stock market and stock prices efficiently reflect which camp currently has more adherents: the buyers or the sellers.The week in question was one when a lot of people were making a lot of emotional and inefficient decisions about buying or selling stocks. The COVID-19 virus has everyone’s attention, and the market and the economy are reacting to the way we are responding to and our fear of the virus in kind. What does all this mean to you as an investor? Keep your head. Try not to let your emotions or greed drive your actions. If you already have a financial plan, stick with it. If you don’t have a financial plan you need to get one ASAP. I personally believe in Factor based investing over long periods of time as the best approach for most investors. Factor based investing doesn’t rely on active fund managers to pick the right combination of stocks or bonds or whatever. Rather, it focuses on market efficiencies and established academic research in an attempt to provide better returns over time. Factor based investing, consistently and unemotionally applied, is the key to long term investing success.
Should I do anything different with my 401(k) contributions during this volatile time in the stock market?
I understand that cash flow is king. Many Americans have been furloughed, had their hours reduced, or even worse maybe they have been laid off. If that is your situation then you will have to make some hard decisions. If it’s a question of paying your rent vs. making your 401k contribution, please pay your rent. However, if you haven’t experienced any disruption in your employment or cash flow then there is NO REASON AT ALL to stop or reduce your 401k contributions. In fact, now is an excellent time to INCREASE those contributions if possible. Stocks haven’t been this affordable in a long time. If you are fortunate enough to have stable income, keep making those contributions.
Should I adjust what funds my 401(k) is invested in during this volatile time in the stock market?
What is happening to the market right now, or what we think will happen to the market over the next six months, should have no bearing over how your 401k plan is invested unless you are planning to retire within the next 24 to 36 months. If you fall in the “Hey! I am trying to retire in the next 24 to 36 months!” category, seek out a qualified advisor to help you determine if an adjustment at this time is necessary or beneficial. For everyone else, determine the asset allocation that is appropriate for the length of time left before you plan to retire. If you are already invested in a suitable way, then make no changes. You should only make a change to your 401k asset allocation If you are not suitably invested for your time horizon.
Should I consider investing more, or less, in international/large cap/mid cap/small cap/fixed income funds?
Again, do not speculate over which asset class or subclass will perform best over the next six to twelve months. Work with a qualified advisor to determine an appropriate asset allocation that is diversified across all asset class categories and appropriate for your time horizon and risk tolerance.
If I were someone who thought I had the stomach for taking on more risk in the market for more reward, but after what happened recently, I don’t know if I still do. What should I do?
Sometimes you realize the roller coaster was a mistake halfway through the ride. There is nothing wrong with that. However, you do have to wait for the ride to stop before you can safely start riding something safer, like the bumper cars. If you reduce your market exposure now and swap it for a safer investment with lower yield, you might never live to see the recovery of your losses. Wait for the recovery. Then change allocations to something you are more comfortable with.
Does it make sense to take on more risk now that stocks have dropped as much as they have?
This depends on why you are thinking about investing money and when you will need that money. If you need that money within the next 24 months, then no, now would be a terrible time to buy stocks. The market could have further to drop. If you are like most investors and we’re talking about how to invest your retirement savings, then now is a great time to make sure your asset allocation and risk exposure makes sense for your timeframe. Ignore what is happening in the market during any short-term period when planning for long-term goals.
Do you expect that the market will continue to be volatile? When will we reach the bottom? When will things rebound?
Yes. The market will experience periods of volatility for the rest of my lifetime and yours. And what’s worse is that those periods are unpredictable in their length or frequency of occurrence. There is no way to accurately predict when we will reach the bottom of this current market decline, if we haven’t done so already. There is no way to predict when the market will rebound. Based on previous market disasters, you can expect several false rebounds before the real one actually begins. These are all the wrong questions for a long-term investor anyway. Do I have the right asset allocation for the length of time before I need these funds? Am I using an investment philosophy that is efficient and based on academic research? Does my overall financial plan make sense in light of my goals and financial resources and timeframe? These are the questions most American investors should be asking themselves during this most current financial crisis.
COVID-19 has brought an unwelcome element of uncertainty and anxiety to our present moment, bringing volatility to markets throughout the U.S. and around the world. These sudden market movements can add an additional layer of concern to our lives and may cause some of us to instinctively consider selling our stocks, whether it be through a 401(k), IRA, or investment account. However, it is important to remember that these are precisely the moments when you should hold fast and stick to your long-term investment goals.
What questions do you have about investing during an economic crisis? Share your thoughts with us on LinkedIn!