What coronavirus market volatility means for your 401(k)

As many of my Guideline colleagues know, I am a big fan of Kai Ryssdal and Marketplace (I recommend the podcast). For several weeks running, Kai has asked his Friday economics panel about whether the coronavirus changes their outlook for the U.S. economy and global stock markets.

Economic downturn

Economic expansions don’t typically die of old age, so could COVID-19 act as a trigger for an economic downturn and negatively impact the stock markets?

For weeks his panelists referenced prior epidemics (SARS, MERS and Zika) and noted that they had only glancing impacts on the US economy and markets, and they expected the same with COVID-19. With the news in the last week of the first US cases of COVID-19, the environment changed quickly.

The U.S. Federal Reserve announced it will cut key interest rates by half a point and the G-7 leaders are scheduling an off cycle meeting to discuss coordinated efforts to limit a potential global downturn. The economic outlook has changed in a pronounced way.

So what does that mean for U.S. investors and retirement investors in particular? The best summary I have seen yet was from Ron Lieber at the New York Times last week which I shared internally with our team at Guideline. Similar to the blog post we authored in the spring of 2017 when markets were choppy, Lieber recommended keeping things in a long-term perspective.

Diverse portfolios

If you invest in a “big, diverse basket of stocks” with low-cost index funds then you are already on a good overall course. If you have invested that way over the last 10 years then you know that the markets have been very good for you and that we are overdue for a correction.

It is important in moments like these to not let your investment portfolio define you. If you step back, you may realize your net worth is bigger than just your portfolio. If you are fortunate enough to own a home, you may have home equity built up. And with the Fed cutting rates, what was already a good time to consider refinancing your mortgage could get even better over the next few weeks.

You may also have some bonds in your portfolio, and if they are high quality bonds (US Treasuries or reputable well capitalized companies) then they will often counterbalance drops in the stock markets. Flighty investors will sell stocks in a reactionary way and rush to Treasuries which increases bond prices―and in turn will lower interest rates.

Lastly, if you are in the workforce, you have an income that should largely weather bumps in the economy and run for years.

Lieber makes another important point that most investors are investing for much longer than they realize and especially so in their 401(k) accounts. There are multiple decades between graduation and the typical retirement age. And even when you retire, you will likely have at least a decade, or even two, to invest over.

Lieber’s last point is that for younger investors, this may be your first big test. It is fine to revisit your risk tolerance and determine whether your allocation between riskier assets (stocks) and lower risk assets (bonds) meets your long-term objectives. Likely, it does and you won’t need to change anything. So now is a good time to take a few deep breaths and continue on your course.