Will the next stock market downturn affect you? It all depends on your age

  • By Quentin Fottrell,
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Millennials are concerned about their 401(k) accounts. Generation X-ers don't want to get burned again. And baby boomers are focused on their retirement. Who has most to lose when there's a market downturn or, worse, an actual crash?

The last few days have been hairy for millions of investors. The Dow Jones Industrial Average (.DJI) and the S&P 500 (.SPX) each fell more than 4% on Monday, marking the biggest one-day percentage decline since August 2011, but rebounded by 2.3% Tuesday in volatile trading as the market digested the events of the last 24 hours.

Whether you're in your 30s, 40s, 50s or retired, you will be watching the market closely and asking, "What does this mean for me?" Financial experts caution against doing something rash, but they also say some Americans have more reason to be concerned than others. The good news: Most baby boomers don't have reason to worry about the correction, says Kyle Woodley, senior investing editor at Kiplinger.com.

"If you're between 55 and 60, there's still time to recover," Woodley says. "Fifty years ago, life expectancy was much lower. You're not investing for the next 5 or 10 years, you're investing for the next 20. You have room to grow your nest egg and participate in that growth. Half a century ago, you would have been in two-thirds bonds in your 50s. That's not the case anymore."

Older savers are the most at risk

Some of those in their 60s and 70s and even 80s, however, may have more reason to be concerned. "They're already drawing down from their portfolio," he says. "They only have a limited time to work with." Even those in their 50s and 60s have more time to recover in a downturn. After all, the 2008 stock market crash had a recovery time of six years.

"Anyone who is selling in a market decline or, worse, withdrawing from their portfolio during a market decline is jeopardizing their long-term financial security," says Greg McBride, chief financial analyst at personal-finance site Bankrate. "Nothing kills a portfolio quicker than taking withdrawals in a declining market. If you have to take a withdrawal, take it from your cash account."

As people get older, however, it's more difficult to produce income, says Mark Grant, chief global strategist of B. Riley FBR Inc. & Wunderlich Securities. "They'll always have the greatest worry. When you're young, you can hopefully make the money back in one way or another." (Based on economic fundamentals, however, he says the most recent stock market volatility is not justified.)

Some older boomers may have more reason to worry: Jared Snider, senior wealth adviser at Exencial Wealth Advisors in Oklahoma City, says your risk depends on how well you have prepared for a downturn. "Those folks who have not prepared are most impacted by it. It can do irreparable harm. They sell out of fear or out of necessity because they don't have any other assets to liquidate."

Lessons for Generation X-ers and millennials

The most recent market drop is, despite some dramatic headlines, not a crash or a correction. While it may worry people who are nearing retirement, such corrections are not uncommon. They provide a timely reminder for all Americans. "I would advise you to have a war chest of stable assets — cash and bonds — so by the time you need liquidity, you have that to spend from."

Woodley agrees. "The biggest risk to Generation X-ers is themselves. Keep calm. You can't let something like this rattle you. You have to stick with it. If you have bad companies, you should still get rid of them. Look for opportunities to buy. In 2009, some people looked at McDonald's (MCD) and 3M (MMM) and thought, 'They're not going anywhere.'"

And millennials? "For younger folks, if you're still in wealth accumulation mode and markets pull back, it's never fun to open your account online or 401(k) and see you're down 10%-plus," Snider adds. "If you have cash to put to work, you're buying assets at discount prices. You can almost think of going to the mall and buying a good pair of shoes on sale. You're loading up on quality companies at lower prices."

And what about people who have either suffered through the Great Recession or, indeed, those who have watched their parents or older siblings lose a large portion of their wealth in 2008? "Turn off the computer and go for a walk," McBride says. "Don't do anything. The economic fundamentals haven't been this good in more than a decade. This is a chance to buy, not an excuse to sell."

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