Amid COVID-19, resist urge to change 401(k)s


As people look at short-term finances in light of the COVID-19, there may be temptations to make changes in their long-term investments, like their 401(k) funds.

But now is not the time to do any of that, said Matt Finn, chief economist at Old National Bank.

“Stay the course,” he said on Tuesday. “Just continue to make your regular contributions. Allow this to work its way through, especially for people who have more than five years left in their working career. Plus, hopefully when you retire, you know you live another 20 years after that.”

Finn acknowledges the current pandemic the world is dealing with has had a negative effect on the market.

“We had a very good year in the stock market last year,” he said. “The S&P 500 was up roughly 31 and a half percent last year.”

The S&P measures the performance of 500 large companies listed on the United States’ stock exchanges.

“This year so far, year to date, the stock market has lost about 20%. So the effect has been big,” Finn said. “It’s on the magnitude of the 1987 stock market decline . It’s on the order of the 2008 stock market decline.”

But those with a 401(k) should not panic, he said.

“Even for people who are near retirement, you still have many years left,” Finn said. “The only people who are perhaps more severely impacted by this would be people who are very old and really don’t have time for the stock market to recover.”

Those working should view this as a moment, albeit an uncertain, rocky moment, that will pass.

“You have to think about it in terms of the long-term recovery of the United States economy,” Finn said. “For that reason, there is a silver lining to all of this, which is your current 401(k) contributions are going in to the market at low levels. You’re, in effect, buying low.

“It would have been nicer had your stocks not lost value at all. But if you keep investing, you are buying stocks at a lower level. And as they recover, your 401(k) balances will recover as well.”

It may be tempting to want to make changes in your 401(k) as a response to what is currently happening in the market. “I understand that again some people want to change their allocations,” Finn said. “They want to change their investments within their 401(k), they want to go to cash. They want to do different things.”

But that may not be the best thing to do at this time. “As we saw last week,” he said, “we had a down day on Monday, of 3 and half or 4 percent. And then on Tuesday, we had the largest point gain ever in the Dow; it was up over 1,000 points. The stock market was up nearly 11 percent in one day.

“If you pull your money out, you miss that, and so does your 401(k),” Finn added. “So you missed a good, you know, several days of up days in the market. It’s almost impossible to predict on a very short term how things are going.”

People, especially those who are still working, should stay calm and wait this out, he advises.

“You’ve really got a longer time horizon than you realize,” he said. “Now is not the time to be changing your asset allocation. Now is the time to just let the things work in your favor over the long term and they’ll be fine.”

Finn said those close to the normal retirement age of 65 to 70, on average, will have 15 to 20 years in retirement.

“The stock market still has time to recover,” he said. “When it does, perhaps you should consider lessening your stock allocation at that time.”

Retirement funds are long-term funds, he said.

“You need to treat them as such and not react to events that may even unfold over the course of 2020,” he said. “In other words, the market may be very volatile for the remainder of the year. But if you’ve got a 20-year investment time horizon, then that means that it’s volatile for 1/20th of the time you do have to invest. You don’t want to take actions that have long-term consequences on your plan.”

One thing the pandemic has shown is the need to have a diversified 401(k) portfolio.

“This brings into sharp light, or sharp focus, the need to have your assets properly allocated,” Finn said. “In other words, the mix of stocks, bonds and cash that you have. Sometimes people find that they have too much in the stock market, because when things like this happen, they panic and say I can’t recover from this. Perhaps you should be more into bonds.”

In times of panic, don’t suddenly make rash changes to your portfolio. “What I would caution people is not to make a quick reaction,” Finn said. “But if you find this particularly unsettling, perhaps you should think about moving more of your money into fixed income securities, like bonds or cash, and less, you know, into the stock market.”

But don’t take everything out of the stock market. “You still need some in the stock market, because it does grow over time and it provides a hedge against inflation,” he said, adding that the market is always fluctuating.

“But clearly the market goes up more than it goes down,” he said, “because if it didn’t, no one would participate. If it was down more than it was up, who would do it?”

The other thing to keep in mind, Finn said, is that the economy was in good shape before this started.

While COVID-19 is going to have some lasting effects, all those effects are not bad, he said.

“This will spur new innovations in technology,” Finn said. “This will change the way Americans work. This will spur changes in how medicine and medical care is delivered to people. This will change the restaurant industry, you know, forever.”

He said this will work out for the good of the community and the economy.

“Change can be good for innovation, it can be good for business, it can be good for the stock market,” he said. “So I tend to look at the more positive aspects of the economy longer term, and think that we’re going to come out of this. Not unscathed, but we will come out of it in a positive way.”

He cautions the public to be careful with making long-term decisions while in a state of panic or worry.

“There is the best side of the story, and there is the worst side of the story,” Finn said. “With the best and worst estimates about this COVID-19 and its effect on the economy, the reality is probably somewhere in the middle.”

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