Young Investors Just Had Their Worst Week Ever in the Stock Market. Here's How to Shrug It Off
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The stock market just posted its biggest one-week drop since 2008. That means for many millennials — who graduated college around that time — it's the worst week their portfolios have ever weathered.
Just a week ago, the Dow was near its record high. But as fears took hold that the deadly coronavirus was spreading beyond China, with the potential to snarl the global economy, U.S. stocks began to tumble. By the end of the week, the Dow was down more than 12%, erasing all of the gains the index had posted in the past 12 months.
Of course, if you're investing in stocks, your time horizon should be long-term, perhaps even decades for retirement savers. Still, it's no fun watching a portion of your hard-earned savings essentially vaporized.
"We've had an unusually smooth ride for the past 10 or 11 years, stuff just kept going up," says Russel Kinnel, Morningstar Inc's director of fund research. "Even experienced investors may have forgotten what it's like feeling the pain of a sell-off."
If you're having trouble staying the course, the good news is there are plenty of tools to help you. A number of these are innovations that arrived, or gained wide-spread adoption, in the past decade or so.
That means, in many ways, it's easier to be a smart investor now than ever before.
Target-date funds
If you're struggling to keep your emotions in check, one of the best things you can do is just put your savings on auto-pilot. One of the easiest ways to accomplish this is by investing in what's known as a target-date fund. These mutual funds own a mix of stocks and bonds that grows more conservative as the target-date (usually an approximation of your retirement date) approaches.
While these funds have been around forever, their popularity exploded in 2006, when Congress passed a law making it easier for employers to designate target-date funds as the default investment in 401(k) retirement plans. (Yes, that means if you are enrolled in a 401(k) and didn't select an investment, chances are you already own a target-date fund.)
Owning the right mix of stocks and bonds is a great way to temper your losses when the market seems to be going haywire. Another key benefit: Target-date funds actually have a proven track record of helping investors avoid buying and selling at inopportune times — times like right now.
Consider target-dates' so-called "investor" returns. That's a measure of mutual fund performance invented by fund researcher Morningstar. It takes into account money flowing into and out of funds, to estimate how investors in a particular mutual fund actually fare over time. For most mutual funds, investor returns lag basic total returns.
For the 10 years ending Dec. 31, 2018, the average mutual fund returned 5.8% a year, according to Morningstar. But fund investors, with their propensity to sell when the market is down and buy when its up, reaped actual returns of just 5.4%.
So-called "allocation funds" — the category that includes target-date funds — essentially eliminate the problem. During the same time frame, the average asset allocation fund returned 5.3%, while the funds' actual investors saw returns of 5.5% on average.
Robo-Advisors
If you want more hand-holding than a mutual fund can offer, the usual solution has been to hire a financial adviser. While traditional financial advisers are expensive and tend to cater to wealthy clients (think those with $250,000 or more to invest), there has been innovation on this front too.
In the past several years, traditional investing firms and tech start ups have rushed to fill the gap, creating services colloquially known as "robo-advisors." Like target-date funds, these typically put investors into an age-appropriate mix of stocks and bonds, although they tend to rely on online questionnaires rather than just your projected retirement date, allowing them to be more closely tailored to your individual needs.
While many robo-advisors are designed to automate investing as much as possible, they frequently allow you to communicate with a flesh-and-blood financial adviser over phone or DM, if you need a pep talk. That extra guidance means investors usually pay an extra fee to be enrolled in a robo, though at times like this you may feel it's well worth it.
When Money last reviewed robo-advisers in 2018, our favorite for beginners was the largely automated Betterment, with no account minimum; and for more experienced investors Vanguard Personal Advisor Services, with a $50,000 minimum.
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