Outside the Box: How to manage your savings — and emotions — in a market upheaval

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With everything going on in the world, it can feel selfish — even petty — to be worrying about your 401(k) and IRA accounts right now.  

We’ve got the four horsemen of the apocalypse covered these days—with plague, war, famine and death amply represented. You can’t look at your phone or turn on the TV without another alarming headline popping up. And even when our lives don’t have personal catastrophes in them day to day, life can still feel like a terrible struggle. Prices are going up faster than incomes, supply chain problems are still causing critical shortages of all kinds of food items and consumer goods, and financial markets seem to be going haywire.

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So it’s hard not to worry. At the end of May, most equity markets were down double digits for the year, and bond returns, which are supposed to provide a safe haven for investors, were down almost as much. Headlines are predicting more economic uncertainty ahead at best, and a recession with prolonged inflation — a combination sure to roil the markets even further — at worst.

At times like these, it’s easy to start obsessing over your 401(k) balance and brokerage accounts, watching your balance — and your plans for that balance — fluctuate daily. But as you probably know, logging into your accounts daily to check on them isn’t the best thing you can do to safeguard your financial future. Why? Because doing so may let your short-term fears about market movements hijack your long term investment plans.  

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Checking your balance may feel like a responsible thing to be doing (I should stay on top of what the markets are doing). Taking an action—any action—like checking your balance may make you feel like you are establishing some control over events. But checking your balance can lead to taking even more action — like selling stocks — to make you feel better about your portfolio. So you feel good about doing something. And even though you know that selling low and locking in losses is unlikely to pay off in the long run, it’s hard to resist once you’ve logged into your account. And then you’ve locked in your losses.

Instead of obsessively checking your balance and maybe giving into the temptation to trade, what is something more productive that you can do? Something that will simultaneously scratch the itch that you feel to do something as well as actually doing something to keep your investment strategy on track during these tumultuous times? Ask yourself one simple question. Ask yourself if your portfolio is right-risked for your time horizon. 

Right-risking is what happens when the level of risk in your portfolio—generally reflected by the percentage of equity in your account—is appropriate for your time horizon. If you are in your 20s or 30s, your retirement account should hold between 80—95% in equities. Any less than that, and you would be under-risked. You wouldn’t be taking full advantage of your ability to ride through market volatility like we’re experiencing now to reap higher returns that will compound over the next 30 or 40 years. If you are in your 50s or 60s, you should have a lower level of risk in your portfolio since you are closer to retirement. Opinions on the exact allocation to equities vary, but in general something between 40—60% in equities is probably appropriate.

So if you are in your 30s, 40s or even 50s and you are right-risked, you shouldn’t be worried about the current market volatility impacting what you’ve set aside for retirement. You won’t be touching that money for decades, so remind yourself that long term returns for balanced portfolios — any portfolio that includes a mix of stocks and bonds like a target-date fund or target risk fund — have generally stayed in the high single digits for decades. This year’s losses will be balanced out by the last few years of stellar returns. And next year, or the year or two after that, your portfolio balance will almost be greater than it was at the end of 2021.   

But what if you are in your 60s? What if you need to start using some of that 401(k) or IRA for living expenses in the next year or two? What if you aren’t right-risked? Does that mean that it’s OK to start liquidating your portfolio? After all, you need to make sure you protect what you have, right?

Wrong. If you aren’t right-risked now, create a plan for how you will get there. The best way to course-correct? Just like driving a car that starts to skid, you want to do it gradually. Make a plan to systematically rebalance your portfolio over time, say one year, to get back on track. You could make 12 small trades, once a month. Or you could make four larger trades, once a quarter. But create a plan and stick to it. You will dollar-cost average yourself back into the correct allocation. 

If you happen to find yourself in the position of needing some of that money, you might consider tapping your emergency savings instead of selling. If you must, you could sell a small portion of your investments, just enough to cover your needs, and make sure you rebalance your account to the appropriate risk level along the way. And remember this: a loss in your portfolio is a loss on paper, not reality, until you sell. Just like a gain is a gain on paper until you sell. 

Even in the aftermath of the financial crisis, balanced portfolios recovered most of their losses within two or three years. The S&P 500 took about five years to recover. And from the depth of the market in 2008 to the end of April, 2022, the S&P 500 is up roughly 500%. The best way to navigate through these tumultuous times is to take a deep breath, remind yourself that you have an investment strategy for the long term, and stick to it. 

Anne Lester is a retirement expert, speaker, and media commentator with over two decades of experience in all aspects of retirement. She spent 29 years as a portfolio manager and Head of Retirement Solutions for J.P. Morgan Asset Management’s Solutions group, holding patents for her progressive design to simplify and automate the retirement planning process.