Will you be ready if the Dow sinks 6,000 points?
Nearly half of Americans lack a plan, survey shows
When it comes to surviving a financial storm, do you have a plan in place to make it through a 6,000-point drop in the Dow?
Nearly half of Americans (44%) say they don’t, according to the latest Country Financial Security Index.
The provocative yet timely question, it turns out, was posed to investors the day after the Dow Jones industrial average’s second decline of more than 1,000 points in early February. During that volatile period, investors’ nerves were frayed, fear levels were elevated and the blue-chip stock average had suffered its first 10% drop in nearly two years.
A 6,000-point drop from Wednesday’s Dow level of 24,682 equates to a loss of about 25%, which more than
meets the definition of a bear market, or 20% drop. Wall Street hasn’t seen that kind a sizable market slump since early 2009.
“Our motivation in asking the question was to get investors’ attention,” says Doyle Williams, executive vice president at Country Financial, the Bloomington, Ill., insurance and financial services company. “We want them to think about a drop of this size ahead of time, to get them to think about what they would do in the moment,” he says.
He adds, “Most people don’t really understand the risks of investing or their own risk tolerance.”
The retirement savings shortfall in America remains a hot topic. The average retirement balance for working families was $95,776, according to the Economic Policy Institute’s most recent study on the state of American retirement published in 2016. Still, the report found that nearly half of families have nothing set aside for retirement.
So what did Country Financial’s survey, which was made available exclusively to USA TODAY before its official release Wednesday, say about Americans’ preparedness if the market runs into real trouble?
In short, a large chunk of people say they are prepared for a big stock market swoon — even though they haven’t taken the steps to ensure their financial well-being.
More than half (52%) of the 1,006 adults surveyed online by independent research firm GfK said they were “financially prepared” for a Dow dive of 6,000 points. Yet only 28% said they had a “financial safety plan” in place, with another 44% saying they had no plan.
Recent fluctuations in the stock market “likely tested Americans’ financial plans,” Williams says.
Every investor should have a plan to help ride out turbulent times, and that includes knowing how you react to stressful periods for stocks like the 10% fall earlier this year, Williams advises.
“Investors need to understand how they will react emotionally the next time the markets go down a lot,” he says.
To survive a period of falling stock prices, he says you should have an adequate emergency fund to avoid having to sell your stocks when they are trading at depressed prices. Sticking to a budget will also help you ride out tough times. Building a diversified portfolio with a mix of different kinds of investments is also a must, he adds.
Williams also says investors with time on their side should remember that down markets are a good time to accumulate shares for your 401(k) at lower prices. That will help boost your account balance when the market eventually rebounds, he says.
“The risk is not the next 20% downturn but missing out on the next 100% uptick,” Williams says.
Overall, Americans straddle the fence between optimism and pessimism, with 49% rating their overall level of financial security as “excellent” or “good,” and
47% saying its “fair” or “poor.”
The survey also found Americans are split on where the market is headed next, which suggests the market’s wild ride in February has made them more wary. While 27% said they expected the stock market to rise in value before the end of the year, a nearly equal number (23%) said they thought the market would “lose value.”
People who think the market will be lower by year’s end wouldn’t rule out a big drop. More than four out of
10 investors (44%) fear the market could fall between
10% and 30%.
Nearly one in five investors (23%) said a Dow plunge of 6,000 points would “delay” their “ability to save for retirement” by as much as two years. And 13% said they would need to tap their retirement savings to supplement lost income if they lost their jobs.”
When asked if they were saving as much as they would like in their 401(k)s and other retirement accounts, 46% said “yes,” but 54% said “no.”
No matter what the market does in the short term, investors will profit over the long run if they have a plan and stick to it, Williams says.
“The biggest enemy of a 401(k) retirement savings account,” he says, “is the investors themselves, not the market.”