Best Ways to Protect Your Retirement from the Coronavirus Stock Market sponsored by Aaron Steele
Due to the deadly COVID-19 spread, investors are looking forward to smart 401(k) advice to save their retirement plans by Aaron Steele. They are confused and don’t know if this is the time to cash out 401(k) assets in stocks or shift to cash or stable bonds to keep their retirement account safe from the coronavirus stock market.
If you think you should sell it, we can understand. The main reason behind this is the coronavirus stock market crash or dropdown. The industrial average of The Dow Jones dropped to the status of a bear market on Mar. 12, trading more than 20% off their Feb. 12 high.
The S&P 500 broad market depreciated by 25.82% for the year on Tuesday, just one day before the NASDAQ suffered its largest drop ever seen in history, a 12.3% plunge.
Surprisingly, the average percentage of The Dow Jones Industrial dropped by almost 3,000 points. That was the biggest drop in one day ever and its largest drop in the month-long crisis. It was the highest drop since the “Black Monday” crash observed in 1987. And we can say that the day was the third-worst day of Dow ever.
On Tuesday, big bulls like the S&P 500 and others dropped. By early afternoon, the S&P 500 increased 4% following an announcement made by Treasury Secretary Steven Mnuchin proposing an $850 billion economic stimulus package to deal with the deadly coronavirus crisis.
It is the best way to answer your question and get information on how to protect your 401(k).
401(k) Advice: How Retirees Look at the Coronavirus Stock Market
Aaron Steele said as we all know, the damage has been done. Even with much effort and hard work, the much-in-demand S&P 500 benchmark is still revolving around 2500, which means it is still 25% lower than its all-time low on Feb. 19.
Many individual investors looked at this February drop as if they slipped off a banana peel from Mt. Everest.
Especially for near-retirees or anyone in the workforce close to retirement, this financial situation is heart-breaking. So, 401(k) experts suggest that it is time to protect your assets. Do you think you should shift to other retirement assets to be on the safe side?
401(k) Advice for Young People: Stick to Stocks
Is it the right time to cash out 401(k) assets invested in stocks and move them to a safer place? Well, it depends on your age and financial situation. According to experts, if you are young or you are not a near-retiree, then your investment game plan can be long term. You have sufficient time to wait for the market to boom once again.
In this case, 401(k) advice says leave your 401(k) funds for now. Look for your asset mix. Know your portfolio stocks and bonds. You need to make sure that you are safe when you take this risk. Don’t forget to invest in stocks and stock mutual funds. Based on your age, time horizon, goals, and risk-taking capacity, invest in your stocks and bonds and try to stick with them.
Why Stocks Protect Your 401(k) Long Term
Now you might be thinking why you would hold your stocks in a stock market crisis? Do you know stocks grow faster than ongoing inflation? Aaron Steele said Samantha Azzarello, the global market strategist on the J.P. Morgan Asset Management Global Market Insights Strategy Team, said that there are so many examples of times when stocks have rebounded from downturns. Examples like the tech bubble, wars, the Great Recession, natural disasters, and political issues.
So, anticipating daily market ups and downs with the long-term mutual funds of your retirement portfolio is the best formula for working on your investment plans.
Azzarello added that studies have shown that mutual fund investors who try to act smart end up selling low and buying high.
401(k) Advice for a Workforce Retiring Sooner
But what should you do when you have the short-term segment of your portfolio? What to do when you have less than a year until investing in your specific goals for retirement? The best 401(k) advice, in this case, is different than the rest. It is advised to keep that money in a safe place.
Matt Fleming, a senior financial advisor with Vanguard’s Personal Advisor Services, said that this should be done before a market downturn strikes. It is not that you have a crystal ball that can foresee the future, but it is just a routine step in your plan.
What to do when you don’t move the money you need before the stock market crash or correction? You can always shift your money to a safer place.
Protect Your Near-Term Retirement Purchasing Power
Some 401(k) advice for the retirement money that you urgently need comes from Dan Keady, Chief Financial Planning Strategist at the Giant Retirement Savings. He says to think of this money as your short-term money in your spending bucket. Your spending bucket should have the amount not related to big price declines. It would be better if those assets generate income. If you have enough income from your traditional pension, like Social Security, annuities, and so on, then you don’t need to shift your money into this spending bucket.
401(k) Advice on Using Safe Short-Term Retirement Funds
If you are a serious 401(k) advice follower and have moved your money into your spending bucket, then here are some tips on types of assets that you should put the money into.
In terms of short-term assets, cash is the best option. Azzarello says high-quality, short-term bonds and bond funds provide short-term stability in addition to providing a higher yield.
There are so many short-term mutual funds and ETFs described by top financial advisors that are worth noticing. There are data giving information on yield, duration, and the credit rating on the funds. It can be checked from the site Morningstar.com.
What are the Safe 401(k) Options?
First of all, it is essential to understand some definitions of 401(k) advice. Short-duration bonds are less sensitive to changes in interest rates. Long-term bonds of two years or less are better and safer. They are likely to change in a changing rate environment. Duration helps to determine the bond risk.
Generally speaking, for every 1% change in interest rates, whether up or down, there is a 1% change in the price of the bond in the opposite direction.
Doing this comes credit risk. Bonds that have higher credit ratings are considered safe. There are securities with a credit rating of BBB OR ABOVE from Standard & Poor, which are higher in quality when compared to the investment-grade level.
According to Steven Williamson, Chairman of the National Association of Active Investment Managers (NAAIM) and Owner of Blackstone Wealth Management, though a bond fund may not have an effective duration or credit rating, the holdings may be cash equivalents like one- to three-month Treasuries, governed by the U.S. government with AAA rating,
What does DoubleLine Low Duration Bond N (DLSNX) mean?
If you want to keep your money safe, think about low-duration bond funds, suggested Terri Spath, Chief Investment Officer of Sierra Mutual Funds. His funds contain only mutual funds that are driven by other asset managers.
30-day SEC yield: 2.49%
Effective for one year
Credit rating: BB
What does Zeo Short Duration Income I (ZEOIX) mean?
Well, this bond is short term and comes loaded with unique properties of higher-yielding, special situation instruments as per Paul Schatz, President of Heritage Capital. For a person looking for short-duration bonds and getting higher yield, these funds play a strong defense partner when needed.
30-day SEC yield: 2.97%
Effective duration is 0.57 year
Credit rating: B
What is Western Asset Short-Term Bond I (SBSYX)?
Schatz discussed this fund and labeled them for people looking for the “super conservative,” only investing funds for a very short term.
30-day SEC yield: 1.65%
Effective duration of 2.22 years
Credit rating: BBB
Understanding iShares Short Maturity Bond ETF (NEAR)
Williamson explained these bonds and said that if someone is looking for capital preservation over a short duration, this fund would be the best way to invest with no risk while getting more income than that of a money market or depository account.
30-day SEC yield: 1.95%
Effective duration: N.A.
Credit rating: N.A.
What is Invesco Ultra Short Duration ETF (GSY)?
Williamson said almost 45% of this funds’ money is in corporate bonds, and if you are looking for a fund for a longer duration than funds weighing bigger in one- to three-month Treasuries, then this fund is for you. No doubt, the risk is more, but the reward is bigger.
30-day SEC yield: 1.89%
Effective duration is 0.37 year
Credit rating: A
What does SPDR Bloomberg Barclays ST HY Bond ETF (SJNK) mean?
Williamson said that if you are ready to take a little more risk, then this bond is for you! This is a longer-duration bond as compared to others and is highly recommended by our 401(k) advice experts. That means these bonds are more durable and vulnerable to changing interest rates. Its average credit rating is B, which is below investment grade. Almost 10% of the bond of this fund is high-yield debt from oil companies, but we must say that this sector provides the highest rewards and is a good way of getting potential capital appreciation as well as income during this coronavirus crisis.
30-day SEC yield: 5.29%
Effective duration is 1.6 years
Credit rating: B
What is the Impact of the Recent Rate Cut of the Federal Reserve?
Good news for investors! Recently, on Sunday, The Federal Reserve executed an emergency cut of its target interest rate to zero, and it is believed that the government should not pull down yields by it for the short-term funds.
Heritage’s Schatz explained yields from these funds, and some funds like them will change their direction from prices to support their underlying bonds. They will try to show the yields on new bonds collected by the funds, which in turn reflects the new Fed rates.
That means some yields may rise, and some may fall.
According to reports, it is expected that ZEOIX will stay the same or increase, and it invests money in lower-quality bonds maturing soon. The funds go through the largest losses ever, down 5% in the last month.
He further added that SBSYX would decline in yield as the credit crisis continues to impact the market, and the company continues to invest in more conservative short-term instruments. It is the best case over the intermediate-term, and its yield has stayed flat. The fund did a phenomenal job and preserved capital during this epic route in the markets.
401(k) Advice is for Funds Only and Not for Stocks
Retirement accounts like 401(k)s and IRAs are different than taxable brokerage accounts, especially when you invest in individual stocks. The 401(k) advice is applicable to how to handle the diversified portion of mutual funds and ETFs of your portfolio.
When you use your stocks, you can buy, hold, add, or sell stocks depending on the time-tested rules suggesting when to get in and get out of your securities.
Final 401(k) Advice and the Rules to Follow
As per Aaron Steele if you think that your 401(k) is not able to offer you safe investment choices like these, then it is not a bad choice to allocate your money to a stable fund inside an IRA. If you are shifting your money from a 401(k), then you must do it by a direct rollover. If you are taking a check payable to yourself, then don’t forget to deposit it in the IRA within 60 days to prevent it from becoming a taxable withdrawal.
Vanguard’s Fleming said people who are 59 1/2 years of age or older and still working with the company could shift money as per their 401(k) plan. More than 70% of plans allow the workforce to do that. This type of money transfer is called an in-service withdrawal. Your plan may have additional limits.