On March 22, 2020, the S&P 500 index fell to a recent low of 2,191.50. That was an amazing fall of 35.3% from the index’s all-time closing high of 3,388.25, reached on February 16, 2020. It was at that point certain economic realities about the COVID-19 pandemic had begun to set in for many investors.
While some experts were quick to point out the market was well overdue for a massive correction, the reality is investors went into panic mode. The one thing novice investors do not like is the uncertainty that comes with unplanned events. People were dumping their stock holdings in one of the largest moves to cash the market has ever experienced. With the massive drop in stock prices across the board, Americans were left to witness dramatic decreases in the value of their retirement savings accounts (401Ks, IRAs and managed accounts).
What novice investors failed to realize was that while they were selling, someone was out there buying. That someone was likely a collective group of experienced investors who saw an opportunity to pick up stocks in fiscally strong corporations at bargain basement prices.
What is done is done. The S&P 500 has largely recovered, hitting as high as 2,947.00 on April 29, 2020. For investors who made the decision to stay the course, the decrease in value of their investment accounts has amounted to nothing more than a small correction in a market that was likely overbought. For those who were sellers in mass, there was a significant opportunity cost that came with the decision to sell.
No one is criticizing investors who took the path to safety when the COVID-19 pandemic hit. If nothing else, it could serve as a learning experience should other health and economic catastrophes hit in the future. There will be more.
How to Approach Retirement Investing in the Future
Most investments come with some level of risk. In most cases, the higher the risk, the higher the rewards will be for taking that risk.
If you are investing for your retirement, you need an understanding of the risk/reward model. This understanding will help you determine your personal sensitivity to risk taking. As a rule of thumb, you should be willing to take more risks the further you are from retirement. Behind this theory in the idea that stock investments will increase an average of 8% to 10% a year over any given 10 year period. That is strongly supported by historical data that dates back 50 years.
On January 1, 2010, the S&P 500 stood at 1,123.58. Today, it stands at 2,830.00. That is a 10 year increase of 252%. While simple math would tell you that is an average increase of 25% a year, the last couple of years have been extraordinary in terms of growth. With that said, it is easy to support the contention that stock investors can expect an average return of 8% to 10% a year over any 10 year period.
Yes, there have been recessions, wars and other pandemics over the last 50 years. The numbers hold. The reason the numbers hold is because the market quickly clears out failed companies and rewards companies that do good work for their investors.
As an investor, you should remain calm during times of calamity. The market has repeatedly shown the ability to recover quickly and nicely over time. Experts are quick to point out that bear markets typically run 12 to 18 months, after which there is always a strong recovery. If you are 20 to 30 years from retirement, you should have plenty of time to recover from any market downturns. While you do need to remain diligent in regard to individual stocks because of performance issues, the market as a whole is a good place to invest.
If you are closer to retirement, you might want to consider investments with less volatility. Under current circumstances, the market has demonstrated just how fast it can lose and regain value. Of course, these are extraordinary circumstances. If you were to decide you do not have enough time to endure the effects of extraordinary circumstances, you can certainly find investment opportunities that come with less volatility. If you still like the idea of maintaining investments in the stock market, you might be a good candidate for mutual fund investing. A tried and true mutual fund will generally outperform other investments in any given year.
Adjust Your Thinking and Expectations
When investing for retirement, your goal should be the creation of enough capital to support the lifestyle you intend on living during retirement. In setting your goals, you need to be realistic. Let’s use a crazy example to make a point.
In India, it is completely legal to play a lottery as long as the lottery holds a viable gaming license within a reputable jurisdiction. The online lottery in India is a fairly new concept to the people of India. Would it be reasonable for any of those people to expect to get rich playing a lottery?Of course not.
As an investor looking to create capital for retirement, you have to be realistic about how much you can create from what you can contribute on your own. The historical evidence tells you it is possible to earn 8% to 10% a year in the stock market if you stay the course. If you trade in and out on whims or in panic, you stand to drastically decrease what you can realistically make.
If you cannot resist being driven by fears like the fear created by the COVID-19 pandemic, you would likely do better with other types of investments. You might want to consider Real Estate Investment Trusts or bonds. There would still be some volatility to endure, but it’s not likely going to be as volatile as the stock market. At the end of the day, you have to do what is best for you. If that means maintaining your piece of mind, so be it. All you need to do is setup an investment portfolio that offers you the right combination of risk and reward.