After sharp declines last week, the S&P 500 briefly entered bear market territory ‒ at least a 20% decline from a recent peak ‒ before rebounding Monday morning. The benchmark index was trading at roughly 5,006 points, down 1.35%, as of 11:21 a.m. EDT. The Dow Jones Industrial Average was down 2.08% and the Nasdaq composite was down 1.17%.
Dramatic market plunges can be stressful, especially for those nearing retirement age. But the general consensus among experts? Don’t panic; it could lead to risky moves that hurt you in the long run.
"There’s always an anecdote of somebody that panics ... and it had more negative impact than if they had just tried to ride it out,” said Sarah Behr, a registered investment adviser and founder of Simplify Financial Planning in San Francisco.
How should younger workers with 401(k)s react to stock market dips?
Younger employees who are just starting to build up their retirement accounts should focus on their long-term savings strategy and continue their investments, according to Mark Williams, a risk-management practitioner and lecturer at Boston University.
“When you are in your 20s, that’s the most time you have until retirement that your money can grow,” he said. “It’s really the best time to invest in stocks."
Many Americans follow an investment strategy called “dollar-cost averaging,” where they commit a fixed amount of money to their retirement accounts at regular intervals, regardless of how the market is performing. USA TODAY previously reported that this strategy can reduce the average cost investors pay per share over time because they'll buy more shares when they’re trading at lower prices.
“Just keep the momentum going,” Behr said. “Compounding interest is a really powerful function in retirement, and if you miss the compounding interest because you took 10 years off during the recession, you might miss a big recovery. And you have a chance to buy low with the expectation that it's going to return at some point in the future.”
The wrong move, according to Williams? Panicking and taking money out of those retirement accounts. Especially since 401(k)s typically charge an early withdrawal penalty for removing funds before the age of 59 ½.
“Market drops test investor resolve,” he said. “It is counterproductive to look at your retirement account daily. Instead, view your investments as part of a long-term strategy that will overcome market corrections, grow and support retirement.”
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He said the same strategy holds true for those in their 40s and 50s, who still have "plenty of time" to make up for any market dips.
Behr also suggests younger investors try to invest at least enough money in their 401(k) to get a match from their employer if one is offered.
It’s also important to remember that market downturns tend to be short-lived, she said.
It takes on average four months for the stock market to recover from a correction, defined as a 10% to 19.9% decline from a recent peak, according to investment research and analytics firm CFRA Research. If stocks fall at least 20% and enter bear market territory, the average recovery time is closer to two years.
Continuing monthly investments toward a 401(k) “is the right thing to do,” Behr said. “If I'm 30 years old, I’m not retiring for 30 or 35 years. I’m not going to touch that money. There is plenty of time for that money to recover."
The Wall Street entrance to the New York Stock Exchange is seen in New York City, U.S., November 15, 2022.
Investors should adjust their allocations “periodically” as they age, according to Yimeng Yin, a research economist at the Center for Retirement Research at Boston College.
But he said those adjustments should be made every few years, not every time the market dips.
“I don’t think it’s wise to react to these short-term market downturns," Yin said. "It’s like trying to time the market. Very few people are good at that.”
How should workers nearing retirement react to a market dip?
Ideally, experts said investors on the eve of retirement should shift to more conservative investments to shield their savings from market volatility. Think a heavier share of investments in bonds and cash, less in riskier stocks.
“I would still say they should be saving. Should they be investing in an S&P 500 index? Maybe not,” Behr said. “Say you’re 63 and plan to retire in five years. You should already be shifting to more conservative investments."
Still, any dips in the stock market can be stressful at this age.
Williams suggested these workers avoid any knee-jerk reactions to stock market dips. Instead, they should assess their near- and long-term retirement needs and recalculate their retirement budget if necessary. That’s especially true if workers find themselves unemployed shortly before their expected retirement age.
Williams said that could mean cutting down their anticipated budget or postponing retirement “a year or two, when the market recovers.”
Behr said those in retirement should ideally have six to 12 months' worth of expenses in money market accounts, which combine features of savings and checking accounts or high-yield savings accounts.
Then, when the market does drop, "they’re not forced to sell funds that hold stock at a lower value,” she said.
For investors without enough cash on hand, though, Behr said they should do what they can to avoid selling stock when markets drop.
“You’re drawing cash. Maybe you’re also changing some of your consumption behavior, like maybe you’re not traveling this summer, or you’re not dining out as much,” she said.
It’ll give investors a better peace of mind and help them avoid selling stock that will hopefully rebound at a later date, she said.
