How To Protect Your Retirement From The Coronavirus Stock Market
Amid a stock market crash or correction, investors seek smart 401(k) advice to protect their retirement plans. Is it time for cashing out 401(k) assets in stocks – shifting to cash or stable bonds – so your retirement account doesn’t shrink more in the coronavirus stock market?
The backdrop, of course, is the coronavirus stock market crash, or correction. The Dow industrials officially dropped to bear market status on Wednesday, trading more than 20% off their Feb. 12 high.
The financial dilemma is make-or-break for retirees and people close to retirement. Does sound 401(k) advice say it’s time to try to protect your assets? Should you shift other retirement assets to safe havens?
401(k) Advice If You’re Young: Stick With Stocks
Is it time for cashing out 401(k) assets held in stocks and moving to them safer holdings? That depends on your age and situation.
If you are young or have more than one or two years until retirement, your investment game plan is long-term in nature, most advisors say. You have time to bounce back from market dips and downturns.
As a result, 401(k) advice says you’re better off leaving your 401(k) funds alone. You should look at your asset mix, though. Know how much of your portfolio is in stocks versus bonds. Make sure you’re comfortable with the risk you’re taking. But stay invested largely or exclusively in stocks and stock mutual funds. Whatever mix of stock and bond funds your investment game plan calls for based on your age, time horizon, goals and risk tolerance, stick with it.
Why Stocks Protect Your 401(k) Long Term
Why would 401(k) advice tell you to hold stocks in a stock market crash or correction? Stocks grow faster than inflation over the long haul. “Given time, stocks have always rebounded from downturns like the tech bubble, wars, the Great Recession, natural disasters, political issues,” said Samantha Azzarello, global market strategist on the J.P. Morgan Asset Management Global Market Insights Strategy Team.
So, trying to anticipate daily market zigs and zags with your mutual funds in the long-term segment of your retirement portfolio is a surefire formula for slashing your investment results.
“Studies show that mutual fund investors who try to do that tend to end up selling low and buying high,” Azzarello said.
401(k) Advice For Those Retiring Sooner
But what about the short-term segment of your portfolio? What if you have fewer than one to two years until needing money for specific spending goals in retirement? The best 401(k) advice in that case is different. That money should be set aside in safer investments or cash.
You should do that before a market downturn strikes – not because you own a crystal ball that foretells the future, but just as a routine step in your plan, once you get within one or two years of your expected retirement, says Matt Fleming, a senior financial advisor with Vanguard’s Personal Advisor Services.
What if you didn’t move money you need sooner prior to the stock market crash or correction? It’s also OK to shift that segment to safe haven assets amid volatility, experts say.
Protect Your Near-Term Retirement Purchasing Power
Solid 401(k) advice gives you a plan for retirement money you need soon. Think of this segment of your portfolio for short-term needs as your “spending bucket,” says Dan Keady, chief financial planning strategist at the giant retirement savings focused financial firm TIAA.
Your spending bucket should hold assets not subject to big price declines. And so much the better if those assets generate income. “If you have enough income from a traditional pension, Social Security, annuities and so on, you don’t need to move money into this bucket,” Keady said.
401(k) Advice: How To Use Safe Short-Term Retirement Funds
And if you do follow 401(k) advice and move money into your spending bucket, what sort of assets should you put the money into?
Cash is the most stable asset in the short-term. And high quality, short-term bonds and bond funds offer almost as much short-term stability, with potential for slightly higher yield, Azzarello says.
Several short-term mutual funds and ETFs, as described by top financial advisors, are worth considering. Data regarding yield, duration and credit rating on the funds are from Morningstar.com as of March 12.
What To Know About Safe 401(k) Options
First, some definitions to understand 401(k) advice. Bonds with shorter durations are less sensitive to changing interest rates. Bonds with a duration of two years or less are safer. They are less volatile in a changing rate environment. Duration is a measure of bond risk.
Generally, every 1% change in interest rates (up or down) will cause a bond’s price to change about 1% in the opposite direction, for every year of duration.
And then there’s credit risk. Bonds with higher credit ratings are safer. Securities with a credit rating of BBB- or above from Standard & Poor’s are higher quality investment grade.
A bond fund may not have an effective duration or credit rating if its holdings are largely cash equivalents like one- to three-month Treasuries, issued and backed by the U.S. government, which has a AAA rating, says Steven Williamson, chairman of the National Association of Active Investment Managers (NAAIM) and owner of Blackstone Wealth Management.
DoubleLine Low Duration Bond N (DLSNX)
“For money you want to keep safe, think about a few strong low-duration bond funds,” said Terri Spath, chief investment officer of Sierra Mutual Funds, whose funds hold only mutual funds run by other asset managers. “We like DoubleLine Low Duration Bond for (its) high quality holdings … yield and low volatility – never losing even 1% in a day.”
- 30-day SEC yield: 2.49%
- Effective duration: one year
- Credit rating: BB
Zeo Short Duration Income I (ZEOIX)
“This is a unique short-term bond fund with higher yielding, special situation instruments,” said Paul Schatz, president of Heritage Capital. “They look for short-duration higher-yielding bonds that may be mispriced or have an event or story where the odds favor a positive outcome. The fund also plays defense when appropriate.”
- 30-day SEC yield: 2.97%
- Effective duration: 0.57 year
- Credit rating: B
Western Asset Short-Term Bond I (SBSYX)
Schatz describes this fund as “super conservative,” only investing “in very short-term, highly liquid instruments.”
- 30-day SEC yield: 1.65%
- Effective duration: 2.22 years
- Credit rating: BBB
iShares Short Maturity Bond ETF (NEAR)
“If an individual wants capital preservation over a short time horizon, this vehicle would be a great way to have nearly no risk while receiving more income than that of a money market or depository account,” said Williamson.
- 30-day SEC yield: 1.95%
- Effective duration: N.A.
- Credit rating: N.A.
Invesco Ultra Short Duration ETF (GSY)
With about 45% of its money at work in corporate bonds, this fund has longer duration than funds that have big weightings in one- to three-month Treasuries. That means slightly more risk. But the reward is higher yield, Williamson says.
- 30-day SEC yield: 1.89%
- Effective duration: 0.37 year
- Credit rating: A
SPDR Bloomberg Barclays ST HY Bond ETF (SJNK)
Are you willing to take on a little more risk? This fund’s bonds have longer duration than other funds recommended by our 401(k) advice experts. That makes those bonds more vulnerable to interest rate moves. Also, the portfolio’s average credit rating is B, which is below investment grade. About 10% of the fund’s bonds are high-yield debt from oil companies, Williamson says. But that sector provides relatively strong yields. “This is a good way to get some potential capital appreciation as well as income during this time,” Williamson said.
- 30-day SEC yield: 5.29%
- Effective duration: 1.6 years
- Credit rating: B
401(k) Advice Applies To Funds, Not Stocks
Retirement accounts like 401(k)s and IRAs are handled differently from taxable brokerage accounts you use to buy individual stocks. This 401(k) advice applies to how to handle the diversified portion – mutual funds and ETFs – of your portfolio.
With your individual stocks, you buy, hold, add or sell based on the rules of a time-tested strategy that tells you when to get in and out of securities.
Final 401(k) Advice: Follow The Rules
If your 401(k) does not offer safe investment choices like these, consider allocating your desired amount to a stable fund inside an IRA. And if you shift money from a 401(k), do it by way of a direct rollover. If you take a check made payable to yourself, deposit it in the IRA within 60 days so it does not become a taxable withdrawal.
“Anyone 59-1/2 years of age or older who’s still employed at that company can move money like that if it’s permitted by their 401(k) plan,” said Vanguard’s Fleming. “About 70% of plans permit that.”
That sort of transfer is called an in-service withdrawal. Your plan may slap on additional limits.
“Someone who is only a few years from retirement is likely to be older than 59-1/2,” Fleming said.