Yes, your 401(k) can survive the 2020 election
WASHINGTON – I’m stressed about my 401(k) retirement plan and what a protracted legal battle over the next U.S. president may do to the stock market.
I’m not supposed to admit this. I should know better. But the volatility of the stock market can take you there: a place of panic.
However, when your emotions will probably drive you to make a misguided financial decision, it helps to get an outside perspective.
“People may remember that the market tumbled in the immediate wake of President Trump’s election, but then recovered and went on to perform quite well,” said Christine Benz, director of personal finance for Morningstar. “Investors were rewarded for sitting tight and not selling. We saw the same phenomenon earlier this year, when the magnitude of the pandemic came into view. Investors who sat tight through what was a very uncomfortable period in February and March were rewarded. Those who sold themselves out in the heat of the moment locked in their losses. We see this again and again. Patience and inertia in the face of volatility are invariably rewarded.”
I asked several financial experts questions about how the election may affect your retirement savings. Here’s what they had to say.
Q: What is your advice if the election leads to a heated court battle that continues to affect the stock market?
“On the planning side, maybe you want to be able to look at a drop in markets as a buying opportunity,” Dan Egan, managing director of behavioral finance at Betterment, said in an interview. “Make it an opportunity rather than a risk or something that you’re really worried about.”
And things may not be as crazy as you think they will be after Election Day, Egan said, pointing to 2016, when betting markets gave Trump just a 20% chance of winning. The day after the election, the market opened flat.
“It’s unlikely that the election results will drive unusual levels of volatility,” Egan wrote in a post for Betterment about how to avoid an election headache.
Q: Should I just sell and wait for the stock market to stabilize after a winner has been declared?
“Everyone is saying that this election will come down to Florida, Florida, Florida,” Benz said. “The key thing to remember if you have stocks and they head down, no matter what’s going on in the world, is time horizon, time horizon, time horizon. If you have a very short time frame until you’ll need to spend your money, whether to buy a house or make a tuition payment, that money shouldn’t be in stocks. The market is just too volatile in the short run. You shouldn’t risk it.”
Benz said many investors have been letting their stock holdings ride for many years, and their portfolios are the better for it. But if you’re close to retirement, you may want to consider taking some money off the table in stocks to safeguard the money you’ll need in the early years of retirement.
“On the other hand, if you have a time horizon of at least 10 years until you’ll need your money, you should be in stocks,” she said. “You need the growth potential, and stocks have been positive more than 90% of the time in various 10year periods throughout market history. Because you’re not spending right away, you should be able to put up with the periodic bouts of volatility that the market faces, whether due to uncertain election results, a pandemic or a financial crisis.”
Q: Should I just put my money in a savings account to avoid the rollercoaster ride of the stock market?
Don’t let the daily seesaw of the markets dictate your investment moves, said Carolyn Mcclanahan, a certified financial planner who founded the feeonly Life Planning Partners based in Jacksonville, Fla.
Like other experts, Mcclanahan said it’s important to make sure you have an emergency fund or funds available that aren’t aggressively invested if you need it in the short term.
“If you need cash for the next three to five years, then you need to take that money out of the market,” Mcclanahan said. “And if the market goes up, you’re going to kick yourself. If it goes down, you’re going to be happy. There’s no way to predict.”
In a newsletter to clients, Mcclanahan’s firm noted that this year, the S&P 500 plunged 35% and then rebounded 60%.
The important thing is to have an investment plan and stick with that strategy, so the gyrations of the stock market don’t result in making changes based on your emotions. “Stick to what you need for you so that all the noise gets excluded,” she said.
Q: Why should I stick with stocks when the market is so volatile?
“Putting up with short-term volatility can be mentally taxing, but it’s the cost of doing business if you want a shot at earning a higher return over time,” Benz said. “If the market falls and you have a long time horizon, try not to peek at your portfolio. Take a walk, bake some bread, find a good book. But do not peek.”
Q: What can I learn from the previous performance of the stock market after an election?
“The big lesson is not to allow your political views to influence your investment strategy,” said Ric Edelman, founder of Edelman Financial Engines said. “If your candidate wins, you become happy and optimistic, and that can cause you to increase your exposure to stocks. If your candidate loses, you become unhappy and pessimistic, and that can cause you to reduce your exposure to stocks. Optimists take too much risk, and pessimists suffer lower returns. Remember that every president is in office for a maximum of eight years, but you’ll be around for 30 or 40 years. Don’t let a short-term presidency harm your long-term financial goals.”
All of the experts agree on this one thing: Over the long term, historical returns suggest that your 401(k) is going to be OK, regardless of the election.
Readers can write to Michelle Singletary at michelle.singletary@washpost.com.