Coronavirus and Retirement Savings: Lessons to help mitigate long-term retirement savings mistakes

It’s easy to say “stay calm” but harder to actually walk the walk.

Keeping emotions out of investment strategies can be challenging even on a normal day. Add a dose of a health pandemic, in this case the worldwide coronavirus, and you could have a recipe for widespread investor panic. Unfortunately, that recipe could be a breeding ground for long-term retirement savings consequences.

As we have seen, COVID-19 is causing volatility in financial markets, both in the U.S. and abroad.

However, there are lessons to learn from history. By looking back in time, we might be able to educate and inform investor actions today.

Lesson #1: Dollar cost averaging

It is a simple investment strategy where plan participants invest a fixed amount into the same fund or investment asset over a gradual period of time. When the investment prices are reduced, investors get a chance to purchase more units, and this can help to reduce price volatility.

Lesson #2: Past performance is no guarantee of future results

Participants should focus on their long-term financial goals, not short-term fluctuations. Even during such market fluctuations as the 2001 tech bubble, the 2008 market crash, and the Great Recession, the average growth rate of the S&P 500 still produced positive annual returns.

Lesson #3: Timing the market

To help weather difficult market turns, portfolios should reflect both a risk and asset allocation approach. This includes diversification, both regionally and by product (stocks, bonds, cash and alternative asset classes). Participants should avoid making any knee jerk reactions, such as moving all of their assets from equities to bonds in the hopes of avoiding any losses due to volatility.

Lesson #4: Throwing in the towel

Post-2008, one study found that 27% of respondents either stopped saving for retirement or adding to their 401(k).1 At the same time, according to a Fidelity Investments report, the average 401(k) retirement plan balance rose by 466% to $297,700 between 2009 and 2019.2 Millennials’ average retirement savings of $7,000 in Q1 of 2009 grew 1,762% to just under $130,000 in 2019. Translation: participants shouldn’t stop saving for retirement in market downturns.

Lastly, try not to watch the markets with myopic intensity. The U.S. is currently experiencing low unemployment, solid GDP and job growth, and a so-called “Goldilocks” economy (overall, neither too hot or cold).

Analysis after analysis of past financial events show that when investors don’t make panicked decisions, they are more likely to ride out volatility and come out ahead.

While we understand that is all easier said than done, please contact us if you have any questions, concerns, or want to talk. We’re here to help.

1 “Betterment’s Consumer Financial Perspectives Report: 10 Years after the Crash.” Sept 2018. Betterment. https://www.betterment.com/uploads/2018/09/Betterment-Consumer-Financial-Perspectives-Report.pdf

2 “Fidelity® Q1 2019 Retirement Analysis: Account Balances Rebound From Dip In Q4, While Savings Rates Hit Record Levels.” May 2019. Fidelity. https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/press-release/quarterly-retirement-trends-050919.pdf

This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. This presentation may not be construed as investment advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and are subject to change without notice. The views expressed are those of the author as of the date noted, are subject to change based on market and other various conditions. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Keep in mind that current and historical facts may not be indicative of future results. Certain risks exist with any type of investment and should be considered carefully before making any investment decisions. Keep in mind that current and historical facts may not be indicative of future results. The information provided is for educational purposes only and not intended to provide any investment, tax or legal advice. Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website.