A financial consultant at Fidelity, Ellen O'Connell, CFP®, recently answered one of your money questions.
COVID-19 has had an impact on my 401(k) and I'm wondering if I should change my investment strategy?
I hear this question a lot lately. Many people are unsure what to do when markets are all over the place, and I see two extremes: doing nothing or selling everything. First, it's important to have an investment strategy. This works best when you identify your goals and understand how much risk you are willing to take to get there. The idea is to set the mix of stocks, bonds and cash in your accounts that can work best for your situation and set a path for how that might change over time.
Once you have this in place, then you can go back to it periodically (at least yearly), to check and see how you're doing. I do this together with my clients throughout the year, and that's when I find out if anything in their lives has changed, like the birth of a new grandchild or a significant health concern, that might alter how they are dealing with their money.
If you haven't reviewed your investments for a while, there's a chance that the ups and downs in the stock market have caused the combination you put together in your accounts to drift away from your initial asset allocation.
For example, you may have a balanced portfolio that is 60% stock and 40% bonds and after a market decline, you will typically see these percentages have shifted. At times, that can mean too much stock—and risk—or too little. Or things could have shifted the other way, and the bond and cash portions of your mix could have swelled to a larger portion of your assets.
With too much risk, you may experience larger losses in a market downturn than you are comfortable with. With too little risk, you may be invested too conservatively for your long-term goals and give up growth potential.
Setting those allocations back to your target mix is referred to as rebalancing, and you might need to sell or buy some stocks and bonds to get there. It's important to do that to keep aligned with your goals, not just to swing with the ups and downs of the market.
Overall, reviewing how you are invested can give you peace of mind that you have a good plan in place and the confidence to stay invested. I have found that people who remain focused on their goals, and not headlines, often have the most long-term success reaching their goals.
If you'd like help reviewing your investments, we're here to help. You can DIY by logging into your account and visiting the Planning & Guidance CenterLog In Required, or you can call us any time. If periodic rebalancing isn't your cup of tea, you could consider investment options that have a portfolio manager doing it for you (for example, a target date fund or a target risk fund) or check out managed account solutions.
Please remember, that while you are dealing with the stress of this virus outbreak and what it may mean for you, your family, and loved ones, Fidelity is here to help you maintain and adjust your financial plan—or help you get one if you don't yet have a financial plan. Having a plan in place can provide piece of mind to help you achieve the financial goals that are most important to you.
Ellen O'Connell is a financial consultant at Fidelity's Investor Center on Congress Street in Boston. Throughout her 28 years with Fidelity, Ellen has helped clients develop financial plans to achieve their individual goals and improve their financial wellbeing. Most recently, Ellen worked on the Women Investors squad, focusing on empowering women to become more engaged with their finances.
Ellen holds a bachelor of science in business administration from Merrimack College in North Andover, Massachusetts, and is a CERTIFIED FINANCIAL PLANNER®.