What to do in times of uncertainty?

 

Trillions of dollars in hard-earning savings have been erased from retirement accounts in what seems to be a blink of an eye. One year's worth of savings gone in a matter of weeks. The decision to sell, buy, or hold has never been more difficult.

 

In the private sector, more than 50 percent of Americans own stocks in their tax-deferred retirement accounts. That total has been increasing, thanks to the market gains since the pandemic and new federal and state rules that require more companies to offer employees access to 401(k)s through the workplace. Congress has also authorized a new rule that goes into effect this year requiring new 401(k) plans to use automatic enrollment.

 

The problem, however, with most tax-deferred plans is how to manage them. Unlike pension funds, which are managed by professionals, individual investors are on their own. That works well during bull markets where you can set it and forget, but in times like these many realize they are out of their depth.

 

Through the years, I have advised many readers to hire a registered investment adviser, especially for those nearing retirement age. And yet, there are still savers who resist hiring a professional money management firm. I am aware that many who prefer to handle their own investments read my columns religiously, however, that is no substitute for active management. 

 

Over the past few weeks, I have fielded many calls and emails like the one above. Readers want to know how and what to do with their investments. My first bit of advice is don't panic. Second, stop checking your account every day. The more you lose, the more the temptation to sell everything becomes to stop the emotional pain of steep losses.  The rest depends on your risk tolerance and age.

 

I asked my former colleague, Scott Little, an investment advisor at Berkshire Money Management, what he is telling his clients. Here is what he is saying.

 

 "One thing holds true for most people. None are going to be using all their money all at once. A retiree may live 20, 30, or even 40 years in retirement, using their savings gradually along the way. Someone in a new career may have 30-40 years to feed their investments before they begin needing their investments to begin feeding them. Even a parent saving for college may have years before substantial funds are needed to pay tuition."

 

That is sage advice. If you are five years or more away from retirement, hold fast unless you can't sleep at night. In which case, it is an indication that you are invested too heavily in one asset class, like stocks. Diversification occurs when you are invested in several asset classes outside of stocks in areas such as bonds and commodities. You can also be diversified by investing some money overseas as opposed to putting all your eggs in U.S. equity.

 

And speaking of those U.S. equity eggs, thanks to the overconcentration by both mutual funds and exchange-traded equity funds in a small group of mega-stocks called the Magnificent Seven, diversification among equity holdings is practically non-existent. And unfortunately, the Mag 7 is getting hit the hardest in this decline.

 

For those comfortable taking on more risk, especially if you are young, middle-aged, or even if retirement is closing in on you. Most of you are still in the accumulation stage of retirement planning. Downturns like this are a real opportunity. The contribution process in employer-sponsored accounts is a perfect vehicle for dollar-cost averaging. Since most contributions are made monthly, gradually increasing your contributions while increasing your allocation to equity makes sense. History shows that downturns like this have been the best opportunities to increase wealth.

 

I recognize that not all of us have the risk appetite to buy stocks ''when the blood is running in the streets." In that case, rebalance your holdings into more defensive stocks like utilities or dividend-paying securities as well as more fixed income.  

 

What if you are retired? Many retirees' greatest fear is that the markets will continue to decline. The worry is that with no income coming in at some point, your money will run out. I knew several retired investors who sold at the bottom during the Financial Crisis of 2008-2009, many on the advice of their brokers. It was the worst thing they could have done. For those who did, It required almost five years to recoup those losses.

 

Rather than panic, devise a plan instead. For example, a plan of action might be to keep a year's worth of cash out of the market, says Scott Little. While the downturn continues, spend down the cash and allow your more growth-oriented investments time to recover. As markets become less volatile over time, use that opportunity to replenish your cash and prepare for the next year. You might also want to reexamine your risk profile. The best way to do that is with a third party, either an advisor or a financial planner.

 

Retirement accounts by their nature are long-term investments. At the same time, investing in stocks is a volatile proposition but the risk-reward ratio is worth it. Stocks will have periods where you can expect to see 20 percent,  30 percent, even 40 percent declines. And yet the equity markets have always come back. The trick is to stay invested.  

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.