It’s damage assessment time for 401(k) investors ·USA TODAY
Adam Shell, Special to USA TODAY
8 min read
Correction & clarification: An earlier version of this story misstated the first name of financial adviser Paul Waller.
Retirement savers should brace for grim news when they review their first-quarter statements. The first bear market since 2009 shaved 20% off the Standard & Poor’s 500 stock index in the January-thru-March period. That means a $100,000 investment on January 1 was worth $20,000 less on March 31.
But rather than fretting over smaller fund balances and sizable paper losses in your 401(k), use your quarterly statement as a teaching tool.
Wall Street is like a battleground again. And just like army commanders do post-combat assessments to analyze the success or failure of a mission, individual investors should closely scrutinize their quarterly statements to see how their overall portfolio held up when the market went down.
Analyzing the statement’s “change in value” column and “asset mix” pie chart are useful tools to help you figure out if your retirement goals remain intact, if funds you own match your risk tolerance, and if your financial plan is still sound or in need of fixing.
“Don’t be in denial,” Peter Mackie, a financial advisor at Wells Fargo Advisors told USA TODAY. “Don’t ignore your statement. Do look at it and keep perspective.”
When you analyze your statement, look for positives as well as flaws. Here’s what to look for and ways to put the numbers into context.
Focus on the future, not the past
Sure, portfolio losses sting. But it’s just one lousy quarter. Don’t blow a short-term loss out of proportion and extrapolate the negative results 10, 20 or 30 years into the future.
The market has recovered and hit new highs after every bear market since 1929. It’s bounced back from the Great Depression. The 1987 crash. The bursting of the dot-com stock bubble in 2000. The Great Recession.
Stock prices don’t go up all the time.
“It’s important to remember these are temporary setbacks,” Mackie says. “It’s only a snapshot in time.”
Rather than focus on a single quarter, it’s better to look at how your portfolio has performed over the past 1-, 5- and 10-year periods. Your portfolio picture will likely look less bleak when you evaluate your 401(k) over years not months, as they are long-term investments.
Look on the bright side
When the market is falling in value, your current 401(k) contributions are benefiting from 20%-off or 30%-off stock sales. Buying low is a big part of long-term investment success. And the more shares you can accumulate now, the better chance your account balance will swell in size over time.
View a big market drop as buying opportunity, says Steve Bogner, managing director at Treasury Partners, a team affiliated with HighTower Advisors.
It’s not often Wall Street offers a blue-light special. When prices are cheap, Bogner says, that’s the time to buy, especially for people with five or more years until retirement. History has shown that “the feeling of the sky is falling has been the best time to buy stocks. The example I use is: That TV you’ve been looking at at Best Buy that was $3,000 is now $1,500 — what do you do?”
“One positive is that investors are able to buy shares at a lower price,” says Paul Waller, a financial advisor at Mackie & Waller Management Group.
Similarly, if you had some cash parked in safe money market funds, you’ll see that you didn’t lose a penny in that investment. They will be “bright spots,” Bogner says.
Another potential positive: if the stock picker running your actively managed fund performed better than the benchmark it’s measure against, says Elizabeth Evans, founding and managing partner at Evans May Wealth. So, if your large-cap U.S. stock fund lost only 15%, vs. a 20% drop for the benchmark S&P 500, you came out a little better than feared.
“This is a victory,” Evans says. “The key to wealth creation and wealth protection is to lose less in bad markets and have meaningful participation in good markets.”
Know what’s in your 401(k)
“It’s important to know what you own,” Waller says. Knowing how much of your portfolio mix is in stocks and bonds or other assets is the only way to gauge how much risk you’re taking, and if your asset mix still matches your targets.
For example, so-called target-date funds or age-based funds that determine the level of risk in your portfolio based on how many years you’re away from retirement are increasingly popular these days. But you need to look under the hood to make sure you don’t own too big a percentage of stocks than you’re comfortable with.
For example, Vanguard’s Target Retirement 2025 fund, which assumes a retiree will stop working in about five years, has 60% invested in stocks. A similar fund targeting retirement in 2040 has nearly 83% in stocks. The more stocks your fund holds, the bigger the losses will be when the global stock markets tumble. You need stocks for growth, but if big losses spook you, these funds might not be for you.
“Be very sensitive to the asset allocation within those target funds and make sure they’re appropriate for your own personal investment objective,” Waller says.
Review your risk tolerance
If the sticker-shock from first-quarter portfolio losses is causing you psychological stress, it’s a sign that you’re less comfortable with taking risk than you thought. It could also suggest that you might consider making changes to your holdings to lower future downside risks.
“This environment has served as a stress-test to reassess risk tolerance,” says Scott Solomon, senior VP at Ayco, a Goldman Sachs company that specializes in company-sponsored financial counseling. “Someone who thought they had a higher appetite for risk, may now realize they do not.”
That’s OK. But any decision to shift the portfolio to a less-risky posture should not be driven by a short-term reaction to current market conditions, but rather be “part of a defined long-term investment philosophy.” So, go through your holdings one by one and determine if you’re comfortable with the risk you’re currently holding. If you’re not, make changes. Ask yourself if you have enough fixed income assets in your portfolio to reflect your need to take less risk.
Consider rebalancing
Check out the pie chart that shows the percentage you have in stocks and bonds. If your plan’s target is 60% stocks and 40% bonds, but the pie chart now shows just 55% in stocks — now’s a good time to sell some of your bond winnings and put the proceeds into stocks to get your stock allocation back up to your 60% target, says Julia Carlson, founder and CEO of Financial Freedom Wealth Management Group.
“This is a great time to reconsider balancing your portfolio,” Carlson says.
Why not looking at your statement might be better
For some people, a viable option is to not even peek at their statement, says Carlson.
“Just tuck it away,” she says, especially if you own a fund or portfolio that has the asset allocation and rebalancing done for you.
“Let’s face it, some do better not knowing,” says Carlson. “It’s like riding the roller coaster with your eyes closed. You may not take in the scenery, but you will make it to the end of the ride without injury.”
Check if your money manager protected you
It’s often said that funds run by portfolio managers should help protect you from outsized losses in down markets. So, if you own so-called actively managed funds, check to see if they posted smaller first-quarter percentage losses than the benchmarks they track, says Evans.
“Volatility and dislocation in the market creates opportunity for active managers,” Evans says. “(They) should shine in this type of market environment, meaning they should ‘lose less.’ If not, it’s time to make a tactical change.”
Before dumping your fund manager, however, make sure you check his or her long-term record, rather than punishing them for what might be one bad three-month span.
Make sure you didn’t make a major mistake
If you’re a DIY investor, a review of your quarterly statement might show that you were way too aggressive for your age and, as a result, might have done real harm to your long-term financial health.
“One should always have an understanding of their risk tolerance before investing and reassess on a regular basis as life circumstances (change),” says Paul Neuner, managing director and partner at Next Retirement Solutions. “There are sure to be many that did not take the time to consider the volatility of the market nor sought guidance and counsel, and may ultimately have done great harm to their savings.”
If that’s you, consider reaching out to a financial adviser to help you get back on track.
