Professor Warr Urges Patience With Retirement Accounts Amid Coronavirus Outbreak
The coronavirus (COVID-19) outbreak has caused financial markets to decline sharply and put individual investors — especially those with retirement accounts — on their heels, wondering how to mitigate their losses while maintaining the health of their accounts.
In light of the significant concerns retirees and general investors have, we asked Richard Warr, associate dean for faculty and academic affairs and professor of finance at Poole College of Management, about the impact the outbreak is having on retirement accounts and how investors can and should manage them during this turbulent time.
Here’s our Q&A with Richard Warr:
Because of the sharp declines in our financial markets, retirement accounts have clearly been hit. What can investors do to aid their retirement accounts during this crisis?
In most cases, you should do nothing. If you have many years until retirement, your account is most likely heavily in stocks. You will have suffered losses, but at this point, there’s not much you can do to recover those losses. However, history has shown that the market will recover. If you are close to retirement, then hopefully your retirement account is more heavily tilted toward bonds and lower-risk assets; in which case, you should be OK. Those who are close to retirement but are still very heavily invested in stocks will suffer a decline in the amount of funds they have for their retirement. Unfortunately, in the short term, it will be hard to recoup these losses.
Are certain retirement or general investment vehicles faring better than others right now or are they all being hit equally hard?
Bonds are doing pretty well; stocks are being hurt pretty badly. Airline and travel stocks are doing terribly, while some, such as the home food service Blue Apron, are having great days.
In equity, investors tend to buy defensive stocks to protect against downturns or bear markets. How can retirees protect their investments (as much as that’s possible) from the negative impacts of events like the coronavirus pandemic?
We have recovered from significant declines in the past. The best advice is to stay the course.
For retirees, the best advice is to focus on the balance between equities as a broad asset class versus bonds and fixed-income securities. Younger investors should be heavily in equities while older investors should be more heavily in bonds. The old rule of thumb is to subtract your age from 100 and that is the percentage of stocks you should have in your portfolio. It’s just a rule of thumb, but it gives you an idea.
For the average investor or retiree, why does the market fluctuate so much during a crisis like this when, by the numbers, the situation is getting worse? In short, what are those rallies about?
The market fluctuates because investors just can’t figure out where the market is going. Small amounts of new information impact stocks in a big way.
What advice would you give to people who want to sell or decrease most of their positions and increase their liquidity or cash holdings?
It’s worth remembering what happened in 2008 with the financial crisis. From October 2007 to March 2009, the market fell by nearly 60 percent. Since the low point in March 2009, we are still up 250 percent even after [Monday’s] losses. The losses represent about a 30 percent drop from the market’s peak in February. So while they are serious, we have recovered from significant declines in the past. The best advice is to stay the course.