Whoever said “don’t look at your retirement account when the market drops” clearly wasn’t considering the stock market crash in March.
Between that, and the economic downturn that followed, millions of 401(k) accounts took a real beating.
The question now is- what’s the best way to recover?
Many retirement savers are still reeling over the impact the market plunge has on their portfolio’s bottom line.
“They get caught up in the emotion of – the market’s falling,” said KJ Dykema, a Master Registered Financial Consultant at Family Retirement LLC in Seattle. “What do I do? I’m worried about this.”
But Dykema cautions investment savers that worry is not a strategy.
“The basis of all of this is the plan,” Dykema said. “If you don’t have a plan for your money, you’re just throwing you money at something.”
First, a reality check: The Dow Jones Industrial average lost more than 23% in the first quarter. The S&P 500 lost 20 percent.
By contrast, a new Fidelity Investments report shows the average 401(k) account lost 19 percent. The average IRA (Individual Retirement Account) lost 14 percent. So many savers are in better shape than the overall market.
One of the top questions people are asking now: With the markets so rocky, should I still contribute if I’m still working and can afford it?
“Yes you should,” Dykema said. “You should continue to contribute in some way possible.”
And her advice is in line with most professionals in the long-term retirement investment field.
If you’re very close to retirement, Dykema said make sure your portfolio includes enough cash for when you’ll need it.
“A lot of people don’t examine cash in their portfolio as an option,” Dykema said. “But when you get closer to retirement, it’s imperative that you have it.”
Cash can also be a helpful strategy if you feel stocks are too volatile and you want to build cash for what you consider a better time to put money back into various funds. But many 401(k) are less than clear in identifying cash options so you can understand them.
Dykema said look for terms like Stable Value Fund, or Money Market Fund, or ask a representative to explain the cash options in your portfolio options. Keep in mind though, they cannot give investment advice.
Investment pros said the key for retirement fund investors who have decades before retirement is to make sure you understand what you’re invested in and have a real plan for your long term goals so you don’t get hung up on the dips.
“You do not need the money right now,” Dykema said. “That money will come back, depending on which source you have it allocated to.”
This is where it gets overwhelming for a lot of us. Dykema likes to help consumers understand five key factors we all can check to compare different investment options.
Go to Yahoo Finance and enter the ticker symbol of the mutual fund you’re interested in. First, check the Expense Ratio — that’s how much the investment is costing you every year. Dykema recommends 0.50% or less for her clients.
Next, check the Morning Star rating. Morning Star is a highly-regarded investment research company that rates investment on a basis of 1-5 stars, with 5 being the best.
Third, check the Yield. That’s free money the fund gives back to you.
Step 4 is the Beta. Beta measures volatility. How much of a roller coaster ride is that investment on? The benchmark is the S&P 500, which is given a comparative value of 1. Higher than one is more volatile; lower than one is less volatile.
Finally, check the performance for its worst year and ask yourself if you weather that.
With these five tools, you can compare those same factors against other investments in the same category in your 401(k) options.
“So your contributions still need to be going in- it’s just what are they going in to,” Dykema said.
If you’re not thrilled about the options in your 401(k) but still want to save for retirement, experts say a self-directed IRA might be a good alternative.
While anyone can invest in an IRA, your ability to deduct taxes from your contributions will vary with your specific income situation so be sure and investigate all the pros and cons.
And if you’re not confident choosing investments, get help from an experienced financial advisor who is who is committed to being a fiduciary, which mean they put your best interest over their bottom line.