If You Must
One benefit of working with retirement plans is that it provides perspective on how a wider range of people are acting with their money during times of crisis. We are by in large not as involved with most retirement plan participants as we are with our private clients. With private clients, we invest significant time assigning each portfolio an Investment Policy Statement. This memorializes a long-term commitment to an allocation that supports return requirements of a broader financial plan. We have discretion on many of the accounts and are directly handling portfolio management. This is not the case with retirement plan participants, where the accounts are self-directed.
One of the reports we receive from our back office identifies retirement plan participants who are changing portfolio allocations. Unfortunately, several those transfers during the past week have been from participants in a long-term, thoughtful asset allocation plans into a money market fund.
Although it may feel as if everyone is selling stocks, it's important to note that the VAST majority of investors do absolutely nothing, even in down years. From Vanguard:
"During 2018, only 8% of DC participants traded within their accounts, while 92% did not initiate any exchanges."
For context, 2018 was a rocky year for the markets, particularly in the fourth quarter.
Any time we get notice of these allocation changes, we reach out to these participants to inquire more about why the change was made. My feedback has been as follows (paraphrasing):
a.) Most of these transfers are taking place after the market is 20-30% off of it's all-time highs. Temporary declines are being turned into permanent losses. It's a devastating time to be focused on the short-term with your long-term money.
b.) I cannot emphasize the following enough - waiting until things 'settle down' is not a viable strategy. Makes psychological sense, no strategic sense. It has never worked,which I would expect to be no different this time around. From 2008-09:
"History shows that market rebounds can be so quick that they are easy to miss. Not only are much of a bull market’s gains achieved in the first year, but a good chunk of those first-year gains occurs very early on.
This year (2009) offers a perfect example. From March 9, when the rally began, to Dec. 17, the S.& P. advanced nearly 65 percent." (Matt here - the economy was still in shambles during this time.) "But if you sold out of your stocks during the 2008 downturn and came back into the market less than a month after the rally started say, on April 1 you would have earned a 37 percent return. In other words, you would have missed out on 40 percent of your potential gains. And if you were two months late in timing the rebound and came back into the market on May 1, you would have missed out on almost 60 percent of your potential gains for 2009."
c.) Although reacting to an external event like this is not appropriate (outside of ongoing portfolio oversight, maintenance, tax loss harvesting, rebalancing etc.) the most important thing is to stay in the game. If that means taking an 80% stock portfolio down to 50% opposed to bailing out completely, then so be it. Let me be clear - this is not an ideal thing to do. But if that's going to allow you to stay in the game for whenever a subsequent recovery takes place, so be it. The only thing worse than selling at a loss would be compounding the problem and missing the recovery.
The news would lead you to believe that everyone is selling stocks. Quite the contrary. If you must do something, don't be extreme, and stay in the game. Hang in there.
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Sources:
How America Saves 2019 (Vanguard)
Patience, Please With the Investment Plan (Paul Lim, New York Times)
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Voya Financial Advisors. Comments concerning the past performance of [e.g. monetary instruments, investment indexes or international markets] are not intended to be forward looking and should not be viewed as an indication of future results.
