Lessons from 2020
I recently took my daughters to the pediatrician for their annual check up and the doctor issued a challenge to them. Make this the year you learn something new, like how to bake or sew or make the fanciest braids, so that in the future when people ask you what you did in 2020, you can tell them you learned something you otherwise may not have.
Essentially, when life hands you lemons, make lemonade. Let's apply this line of thinking to our retirement plans. What are some things you can do differently in the new year when it comes to your investments that you may not have otherwise thought about if it weren't for the pandemic?
Contribute More to Your Retirement Plan
One thing 2020 has taught us is that we can save more than we think. The shutdowns that occurred because of the pandemic greatly restricted our ability to go out to restaurants, bars, movie theaters, concerts, sporting events, etc. You may have seen a slight uptick in your toilet paper spending, but in general, you probably spent less than normal due to the inability to socialize. As things slowly go back to normal, instead of going back to old spending habits, think about putting that extra bit of money you didn't spend at a restaurant toward your retirement plan contribution. As the below chart illustrates, even just increasing your contribution by 1% can make a big difference.
Keep Your Emotions Out of Investing
The past 12 months have been full of uncertainty and volatility. In times like these it is hard to think long-term about your investments, but it is very important not to make financial decisions based on fear. Make your plan and stick with it. Don't try to time the market. Monday, March 9 was the largest point drop for the Dow Jones Industrial Average (DJIA) in history, followed by two more record-setting drops on March 12 and March 16. By March 23, the S&P 500 index fell 34% to a market low. Despite those drops, the market rebounded pretty quickly and as of 12/31/20 the S&P 500 is up 67.88% from the low on March 23 and up 18.4% year-to-date as of 12/31/20. How did you react to this volatility back in March? Did you keep contributing or did you panic and pull your money out? Remember, you are investing for the long-term, so stay focused on your financial goals and make decisions based on those goals, rather than on the "noise" surrounding the markets.
Diversify Your Investments
As we saw in 2020, things can drastically change at any moment and we have no control over it. What we can control, however, is how our assets are invested. It's important to find the right mix of stocks, bonds and cash to suit your time frame and risk tolerance. The amount of time you have to invest before retirement plays a major role in how aggressive your investments are. If you are closer to retirement, it makes sense that you will want to have less risky investments, like stocks and more safer ones, like bonds. If you are farther from retirement and have more time to invest, your portfolio can handle the volatility that comes along with being invested in the stock market. Determining what the right mix is for you and how much risk you can handle is an important task and can seem overwhelming on your own, which brings me to my final point:
Utilize the Support of a Financial Professional
Even if you had a plan at the start of 2020, you certainly couldn't have factored in a worldwide pandemic. Building a relationship with a financial adviser can help you sleep better at night when things get rocky in the markets. Reach out to an adviser at Spectrum who you can trust and rely on for support during challenging times such as these. Find a way to make something positive out of such a difficult year and think about what lessons you've learned from it.
Hindsight truly is 2020. Happy New Year!