In high-flying market, risk abounds
The latest word from the country's largest IRA and 401(k) plan provider Fidelity: Neither political machinations nor fear of a global pandemic or warnings from seasoned investment pros have taken a toll on the record highs the stock market has seen in recent days. Investors have also seen record amounts in their retirement accounts at year-end 2019.
In fact, the bull market has been coining retirement-plan millionaires. On Fidelity's books, there are now 233,000 401(k) millionaires and 208,000 IRA millionaires.
Even “average” investors have increased their personal wealth dramatically. See how you compare to the Fidelity statistics:
■ The average 40l(k) balance rose to a record $112,300, a 17% year-over-year increase.
■ The average IRA balance also rose to a record $115,400, up 17% from a year ago.
■ The average 403(b) plan balance was up 18% to $93,100.
Clearly, stock market participants have done well since the Dow Jones Industrial Average bottomed around 6,700 in the spring of 2009. Those who weren't scared off in the panic, and kept contributing automatically, found their regular monthly investment amount purchased more fund shares at lower prices. Then, as the market soared over the next 11 years, their account values grew dramatically.
That performance didn't take investment genius. Most of those accounts were invested in index funds that tracked overall market performance, or in stock funds that also reflected overall market gains. And that's the way it is supposed to work — over the long run.
I never tire of reminding investors that over the long run — at least 20 years — a diversified portfolio of large-company American stocks, with dividends reinvested, will come out ahead, even adjusted for inflation. That's the conclusion of the Ibbotson market historians who analyzed every 20year period going back to 1926 and found no losing 20-year period, if you include reinvested dividends (which account for about 40 percent of the total return).
So, if you have a lot of 20-year periods ahead of you, the smart move is to keep contributing to your retirement plan, stay diversified, and have the discipline to ride out the ups and downs that will surely come your way.
But what if you're close to retirement? It's never easy to maintain the discipline to keep investing in a bear market. But it is especially difficult — and very dangerous — to hold that position if you're on the edge of, or already into, your retirement years.
The reason is simple. Time is no longer on your side. You need retirement savings to live. You will have to take required minimum distributions (RMDs) from your retirement accounts every year starting at age 72. Thus, you might be forced to sell stocks at a time when the market is making lows if you haven't set aside some money for withdrawals inside your retirement account.
If you're at or near the stage of taking RMDs, this is the time for risk management, not market timing. No one knows when this market will stage a bear retreat, or what might trigger it.
Money is fuel for stocks. And there is plenty of money-moving stock markets these days. We've had a decade of global central banks creating liquidity to keep their economies from stagnating. And much of that liquidity has found its way into the U.S. stock market. In recent weeks, China joined that trend, creating ¥1.7 trillion ($243 billion in U.S. dollars) to keep the Chinese economy afloat as the coronavirus closed plants and shut down commerce.
Like water, money seeks its own level. And it flows most easily into liquid markets that are perceived to be safe and well-regulated.
When predicting when and how the markets will continue to trend, an old saying comes to mind: “The bigger they are, the harder they fall.” And that's The Savage Truth.