Ask An Expert: What Should I Do With My Retirement Accounts During A Recession?

This article is brought to you by Fidelity.

If you follow TFD on Instagram, you’ve most likely met our resident investment expert, Amanda Holden! Here, she breaks down one of the biggest money questions our readers have been asking lately.

What should you do with your retirement accounts during a recession? Here’s your short answer: It depends, but probably not a whole lot!

Right now, we’ve all got a list of things to be stressed about. (A list might be an understatement, here. A list is for groceries. One of those long, old-timey, dramatically unfurling scrolls like Santa Clause uses is probably more accurate.) Your small piece of good news amidst the chaos is that your retirement accounts needn’t take up too much space on that list.   

That said, you aren’t wrong to worry about your investments. In fact, your concern is a sign that your big, beautiful human brain is working just as it should. Our brains are meant to alert us to some perceived danger, encouraging us to take action. Generally, that’s a good thing! 

Think about what it felt like to look up your retirement account balance in March, after the stock market’s precipitous decline. Did it make your skin hot? Could you feel the adrenaline coursing through your body? Did you get the urge to do something — anything? To punch a hole through the wall or slam your computer shut? To cash out and escape to the jungles of Costa Rica?

This is your brain working, yes, but this “caveman” response is significantly more useful for fighting off mountain lions and protecting our cavebabies than it is for dealing with investment markets — a decidedly modern invention that is mismatched with our deeply primordial response systems. You see, investment markets generally require that we not act on our instincts.

But, our innate responses can be strong. Me simply slappin’ your upper arm and saying, “hey bud, just don’t stress about it,” is probably not convincing enough to override instincts. To achieve true calm, you must really understand what you’re invested in, and how our complex brains may be working against us to make good decisions.

Before we dig in, I want to make a quick point of clarification about the question we’re answering. When I’m asked this question — which is happening a lot, right now! — it’s usually regarding the investments held within the account. But I recognize that the question could also be about the account itself. So, below, I’ve split our one big question into two. First, “should I change my investment strategy?” And second, “Should I keep making contributions to my retirement account?”

Question One: Should I change my investment strategy?

Answer: It depends, but probably not. 

We make a decision to be invested in the stock market because it matches with our long-term goals for our money — not because of what’s happening in the market this month. If nothing about our goals and risk tolerance have changed, neither should our investments. Additionally, it’s not generally wise to make big changes during times of volatility. 

Now, some of you might be thinking, “I don’t own stocks!” Well, if you saw the value of your retirement account fluctuating over the last few months, you surely do! You may own stocks within a fund, a retirement target-date fund, or other retirement plan strategy. 

For a moment, let’s step away from the stock market. Let’s think about a different type of investment: a home. Imagine we’re in the midst of a real estate bubble, like 2008. You are living in a home that you bought for $500,000. The market crashes, and now it is valued at $250,000. 

Would you try to actively try to sell your home, because it is now valued at less? 

Most likely not. You know that the home is providing you a value, so it doesn’t really matter how much you could get if you tried to sell it right now. At the very least, you’d wait for better days. 

With a stock or an investment in the stock market, the value is much less obvious. A stock is not a tangible thing, like a home. A stock does not keep me warm at night. I cannot watch The Crown inside of a mutual fund. Therefore, it’s easy to lose sight of why we own it.

Even though we can’t hold it, a stock is very much a thing that exists. A stock is a share of ownership in a company. If you own a share of Starbucks or Microsoft stock, you now own a fixed percentage of that company. (Granted, it’s a very small fraction of a percentage!)   

Let’s look at another hypothetical. Imagine a company that is going to split its ownership up into ten shares. Each share represents a 10% stake in the company, and each share is selling for $100. You happen to believe in the future of this company, so you buy a share. That’s all a stock is! 

Then, COVID-19 sweeps in, and everyone’s rightfully worried. Due to market pressures, the value of one share drops to $80. A bummer, but remember — that’s just how much money you’d get if you tried to sell it now. But if you’re not trying to sell your share right now, who cares? 

In fact, wouldn’t it be a good time to buy a share for $80? This is one of the ways our brain plays a trick on us. When the value of an investment goes down, we assume that it will continue to go down. This is called recency bias. But, establishing a belief about whether an investment is “good” or “bad” based on price moves over a short period is a dangerously shortsighted move. 

I have a hunch that you didn’t buy this share to sell it for $80, or even $120, for that matter. You bought it so that you could sell it many years from now, potentially for thousands of dollars! An investment in a business is not of the get-rich-quick variety. That’s just not how business works.

An investment in the stock market is an investment in many businesses. Business and stock market growth comes in waves — not every year can be a banner year. Some years might be negative. That’s life! (You’re telling me you haven’t ever had a weird year? I know I have. 2011.) You can’t be a successful stock market investor without knowing this into your bones. This is why you hear the same investing advice over and over: stick with it for the long haul.

As of this writing, the volatility seems to have leveled out, for now. Moving forward, who knows? But for young investors, it really doesn’t matter much. To invest in the stock market is to invest for the long-term. 10 years may be okay, but 20, 30, and 40 years is better. In the short-term, we cannot control the stock market. We cannot predict it, or make it do something it was not planning on doing. It is only reasonable to hope that it moves higher over many, many years. 

Question Two: Should I keep making contributions to my retirement account?

Answer: It depends on your current financial situation. 

From an investing strategy standpoint, the answer is yes. Continue to make contributions and invest no matter what the market is currently doing, because you’re in it for the long-haul. 

But, investing theory is only one piece of this. You also have to consider your personal financial situation. 

Your highest financial priority right now is weathering any continued economic downturn. Unfortunately, it’s hard to say just how long a recession could last. If you have any doubt about the stability of your employment or the strength of your cash reserves, turn off the retirement contributions for now, and redirect that money to an easily accessible savings account. 

Why? Well, a retirement account is not all that great of a place for money that you may need in the near future. That’s because there are tax rules and penalties associated with these accounts. 

At this point it is helpful to remember what a retirement account is and isn’t. I often hear people say, “my 401k is an investment,” or my “Roth IRA is my investment.” And this is so close, but not quite accurate! A 401k and a Roth IRA are not investments, but accounts. They are fancy, tax-advantaged accounts that hold investments, but they’re still just accounts. 

Retirement accounts exist to give investors a tax benefit on any money saved for the future. In exchange for providing a tax benefit, the IRS has some rules as to when we can use the money. If you want to access money in a retirement account, there could be penalties, taxes, or both. Before tapping into one of these accounts, it’s a good idea to check with a tax professional. 

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