Where are the markets headed? That is a question I hear and get a lot these days with the pandemic still raging throughout the globe. The answer is no one knows what will happen to the markets as this pandemic plays out on the world stage. But there are some things we can learn from a time-tested approach to investing in the markets. While yes, we have seen a welcome comeback in the markets in the months since they collapsed in February and March. In fact, the NASDAQ on Monday closed at an all-time high, and the down started the month on a positive note as well. But again, what does that mean for the average investor or someone who regularly invests in a 401(k)?
The answer is both simple and complex at the same time. For those who are buying in their 401(k), it means you were able to buy some shares of your particular investment on the cheaper side for a few months in the early spring. But if you panicked and sold, then you locked in your losses and maybe buying at prices that are considerably higher than those where you sold at. The best thing to do is think with a long-term attitude and do nothing when the markets take a turn and go south again. But that does not mean that you should do nothing now.
If you are retired or will retire in the next 18-months, you may want to consider selling some of your equities at these higher prices. Yes, the markets could continue to go up, but they could just as easily go down. The reason I bring this up now is selling now while the markets are relatively strong you will lock in your profits and have a cash position in the event the markets go down as this pandemic lingers. And by selling some of your appreciated assets now, you are guaranteeing yourself a certain level of cash n matter what happens. And if you are in retirement or nearing retirement, I recommend that you have about two years’ worth of Required Minimum Distributions or an alternative amount of cash for those two years.
A good gauge of what would have happened if you had not sold a retirement account that is managed for you is by examining Vanguard’s 2030 Target Date fund. If you are not aware of these financial tools, they tend to invest in indexed funds and rebalance automatically for you and become more conservative as you get closer to your retirement date. In this example, you are plus or minus five years of retiring in 2030. The current asset mix of this target date fund is 67% in equities, 31% in bonds, and 2% in cash. And as you get closer to your date of 2030, the fund will rebalance and shift from equities to bonds and cash—all for a small management fee, of course.
So, what would have happened to this fund over the past 12-months had you refrained from selling and continued to buy more shares? As I mentioned earlier, you would be buying, on average more shares per transaction as the price did go down with this fund. From the fund’s peak in early February to the bottom in March, the fund did lose almost 25% of its value. No one likes losses like that, but consider the S&P 500 lost nearly 34%. By owning this fund, you lost 9% less than a standard S&P 500 indexed fund. And the fund’s performance over the past 12-months has been a positive 0.2%.
Now here is where I must make the following disclaimers and say that your situation is unique, and you should not base investment decisions in your accounts based on what I have written. And, past performance is in no way a guarantee of am investments future performance. Before you decide to make any major changes in your investments, please do your due diligence and, if needed, consult a fee-only Registered Financial Consultant.
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[…] I touched on what people can do to their portfolio in the current environment in a post titled, What to do with your portfolio? In that post, I briefly touched on a Vanguard 2030 Target Date fund and how it has performed since […]