Helpful miscellaneous articles
regarding our retirement plan and planning.
Like you, I review my retirement nestegg and plan from time to
time. Recently, I went though some continued
education for some credentials I maintain and it occurred to me that we all
could use a review about these issues.
So with your help, we will share and post articles and info that may be
helpful and of interest to many of you in this section.
How To Protect Your
Retirement From The Coronavirus Stock Market
04:40 PM ET 03/17/2020
Amid a stock market
crash or correction, investors seek smart 401(k) advice to protect their
retirement plans. Is it time for cashing out 401(k) assets in stocks — shifting
to cash or stable bonds — so your retirement account doesn't shrink more in the
coronavirus stock market?ings
Fullscreen
If you're thinking
about selling, it's understandable. The backdrop, of course, is the coronavirus stock
market crash, or correction. The Dow Jones industrial average
officially dropped
to bear market status on March 12, trading more than 20% off their Feb. 12 high.
The broad market in
the form of the S&P
500 was down 25.82% for
the year going into Tuesday. One day earlier, the Nasdaq had suffered its
largest percentage drop in history, a 12.3% plunge.
The Dow
Jones industrial average
fell almost 3,000 points. That was its biggest one-day points plunge ever and
its largest drop in the month-long crisis. It was the highest percentage
plummet since the infamous "Black Monday" crash of 1987. And it was
the Dow's third worst day in percentage terms ever.
On Tuesday, the
S&P 500 and other barometers rallied. By early afternoon, the S&P 500
was up 4%. That followed Treasury Secretary Steven Mnuchin's announcement
of a proposed $850 billion economic stimulus to combat the coronavirus crisis.
It's enough drama to
make you question if you're better off keeping the market's hands off your
401(k).
401(k)
Advice: How The Coronavirus Stock Market Looks To Retirees
The damage is done.
Even with the stimulus-induced rally, the popular S&P 500 benchmark is
still trading around 2500. That means it's still down more than 25% from
its Feb. 19 all-time high.
That drop from its
February peak looked like slipping on a banana peel off Mt. Everest to many
individual investors.
Especially for
retirees and people close to retirement, the financial dilemma is
heart-stopping. Does sound 401(k) advice say it's time to try to protect
your assets? Should you shift other retirement assets to safe havens?
401(k)
Advice If You're Young: Stick With Stocks
Is it time for cashing
out 401(k) assets held in stocks and moving to them safer holdings? That
depends on your age and situation.
If you
are young or have more
than one or two years until retirement, your investment game plan is
long-term in nature, most advisors say. You have time to bounce back from
market dips and downturns.
As a result, 401(k)
advice says you're better off leaving your 401(k) funds alone. You should look
at your asset mix, though. Know how much of your portfolio is in stocks versus
bonds. Make sure you're comfortable with the risk you're taking. But stay
invested largely or exclusively in stocks and stock mutual funds. Whatever mix
of stock and bond funds your investment game plan calls for based on your age,
time horizon, goals and risk tolerance, stick with it.
Why
Stocks Protect Your 401(k) Long Term
Why would 401(k)
advice tell you to hold stocks in a stock market crash or correction? Stocks
grow faster than inflation over the long haul. "Given time, stocks have
always rebounded from downturns like the tech bubble, wars, the Great
Recession, natural disasters, political issues," said Samantha Azzarello,
global market strategist on the J.P. Morgan Asset Management Global Market
Insights Strategy Team.
So, trying to
anticipate daily market zigs and zags with your mutual funds in the long-term
segment of your retirement portfolio is a surefire
formula for slashing your investment results.
"Studies show
that mutual fund investors who try to do that tend to end up selling low and
buying high," Azzarello said.
401(k)
Advice For Those Retiring Sooner
But what about the
short-term segment of your portfolio? What if you have fewer than one to
two years until needing money for specific spending goals in retirement?
The best 401(k) advice in that case is different. That money should be set
aside in safer investments or cash.
You should do that
before a market downturn strikes — not because you own a crystal ball that
foretells the future, but just as a routine step in your plan, once you get
within one or two years of your expected retirement, says Matt Fleming, a
senior financial advisor with Vanguard's Personal Advisor Services.
What if you didn't
move money you need sooner prior to the stock market crash or correction? It's
also OK to shift that segment to safe haven assets amid volatility, experts
say.
Protect
Your Near-Term Retirement Purchasing Power
Solid 401(k) advice
gives you a plan for retirement money you need soon. Think of this segment of
your portfolio for short-term needs as your "spending bucket," says
Dan Keady, chief financial planning strategist at the giant retirement savings
focused financial firm TIAA.
Your spending bucket
should hold assets not subject to big price declines. And so much the better if
those assets
generate income. "If you have
enough income from a traditional pension, Social Security, annuities and so on,
you don't need to move money into this bucket," Keady said.
401(k)
Advice: How To Use Safe Short-Term Retirement Funds
And if you do follow
401(k) advice and move money into your spending bucket, what sort of assets
should you put the money into?
Cash is
the most stable asset in the short-term.
And high quality, short-term bonds and bond funds offer almost as much
short-term stability, with potential for slightly higher yield, Azzarello says.
Several short-term
mutual funds and ETFs, as described by top financial advisors, are worth
considering. Data regarding yield, duration and credit rating on the funds are
from Morningstar.com as of March 12.
What
To Know About Safe 401(k) Options
First, some
definitions to understand 401(k) advice. Bonds with shorter durations are less
sensitive to changing interest rates. Bonds with a duration of two years or
less are safer. They are less volatile in a changing rate environment. Duration
is a measure
of bond risk.
Generally, every 1%
change in interest rates (up or down) will cause a bond's price to change about
1% in the opposite direction, for every year of duration.
And then there's
credit risk. Bonds with higher credit ratings are safer. Securities with a
credit rating of BBB- or above from Standard & Poor's are higher
quality investment grade.
A bond fund may not
have an effective duration or credit rating if its holdings are largely cash
equivalents like one- to three-month Treasuries, issued and backed by the U.S.
government, which has a AAA rating, says Steven Williamson, chairman of the
National Association of Active Investment Managers (NAAIM) and owner of
Blackstone Wealth Management.
DoubleLine
Low Duration Bond N (DLSNX)
"For money you
want to keep safe, think about a few strong low-duration bond
funds," said Terri Spath, chief investment officer of Sierra
Mutual Funds, whose funds hold only mutual funds run by other asset
managers. "We like DoubleLine Low Duration Bond for (its) high quality
holdings ... yield and low volatility — never losing even 1% in a day."
·
30-day
SEC yield: 2.49%
·
Effective
duration: one year
·
Credit
rating: BB
Zeo
Short Duration Income I (ZEOIX)
"This is a unique
short-term bond fund with higher yielding, special situation instruments,"
said Paul Schatz, president of Heritage Capital. "They look for
short-duration higher-yielding bonds that may be mispriced or have an event or
story where the odds favor a positive outcome. The fund also plays defense
when appropriate."
·
30-day
SEC yield: 2.97%
·
Effective
duration: 0.57 year
·
Credit
rating: B
Western
Asset Short-Term Bond I (SBSYX)
Schatz describes this
fund as "super conservative," only investing "in very
short-term, highly liquid instruments."
·
30-day
SEC yield: 1.65%
·
Effective
duration: 2.22 years
·
Credit
rating: BBB
iShares
Short Maturity Bond ETF (NEAR)
"If an individual
wants capital preservation over a short time horizon, this vehicle would be a
great way to have nearly no risk while receiving more income than that of a
money market or depository account," said Williamson.
·
30-day
SEC yield: 1.95%
·
Effective
duration: N.A.
·
Credit
rating: N.A.
Invesco
Ultra Short Duration ETF (GSY)
With about 45% of its
money at work in corporate bonds, this fund has longer duration than funds that
have big weightings in one- to three-month Treasuries. That means slightly more
risk. But the reward is higher yield, Williamson says.
·
30-day
SEC yield: 1.89%
·
Effective
duration: 0.37 year
·
Credit
rating: A
SPDR
Bloomberg Barclays ST HY Bond ETF (SJNK)
Are you willing to
take on a little more risk? This fund's bonds have longer duration than other
funds recommended by our 401(k) advice experts. That makes those bonds more
vulnerable to interest rate moves. Also, the portfolio's average credit rating
is B, which is below investment grade. About 10% of the fund's bonds are
high-yield debt from oil companies, Williamson says. But that sector provides
relatively strong yields. "This is a good way to get some potential capital
appreciation as well as income during this time," Williamson said.
·
30-day
SEC yield: 5.29%
·
Effective
duration: 1.6 years
·
Credit
rating: B
Impact
Of Federal Reserve's Recent Rate Cut
One bit of good news:
The Federal Reserve's emergency cut on a recent Sunday of its target interest
rate to near zero should not pull down yields by itself for these short-term
funds.
Yields by these funds
and funds like them will move in the opposite direction from prices for their
underlying bonds. They'll also reflect yields on new bonds bought by the
funds, whose rates reflect the new Fed rates, says Heritage's Schatz.
So some yields may
rise. Others may fall.
"ZEOIX yield will
likely stay the same or increase a bit as it invests in lower quality bonds
that mature soon," Schatz said. "ZEOIX is seeing one of largest
losses ever, down 5% in the past month."
He
added, "SBSYX will likely see a decline in yield over time as the
credit crisis abates and they invest in more conservative short-term
instruments. Best case over the intermediate-term, its yield stays flat. The
fund has done a very admirable job of preserving capital during this epic rout
in the markets."
401(k)
Advice Applies To Funds, Not Stocks
Retirement accounts
like 401(k)s and IRAs are handled differently from taxable brokerage accounts
you use to buy individual stocks. This 401(k) advice applies to how to handle
the diversified portion — mutual funds and ETFs — of your portfolio.
With your individual
stocks, you buy, hold, add or sell based on the rules of a time-tested
strategy that tells you
when to get in and out of securities.
Final
401(k) Advice: Follow The Rules
If your 401(k) does
not offer safe investment choices like these, consider allocating your desired
amount to a stable fund inside an IRA. And if you shift money from a 401(k), do
it by way of a direct rollover. If you take a check made payable to yourself,
deposit it in the IRA within 60 days so it does not become a taxable withdrawal.
"Anyone 59-1/2
years of age or older who's still employed at that company can move money like
that if it's permitted by their 401(k) plan," said Vanguard's
Fleming. "About 70% of plans permit that."
That sort of transfer
is called an in-service withdrawal. Your plan may slap on additional limits.
"Someone who is
only a few years from retirement is likely to be older than 59-1/2,"
Fleming said.
Follow Paul Katzeff on
Twitter at @IBD_PKatzeff for tips about personal finance and strategies of the best
mutual funds.
(As with any of these informative articles,
anyone who needs someone to talk to about
this
very subject contact me and I can direct you to a knowledgeable advisor).
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