The stock market got off to a rough start in 2014. The U.S. employment numbers were deeply disappointing two months in a row. Other data suggested the economy had hit a soft patch. Emerging markets have been under siege since the beginning of the year, with the currencies of Turkey, Argentina and Brazil down sharply. Many investors decided to flee emerging markets for safer havens, raising concerns about prospects for another downward global contagion.
But the U.S. stock market has since snapped back, and concerns about emerging markets seem to have shifted toward figuring out implications from slower growth rather than prospects for financial Armageddon.
The healthy stock market of recent years has restored value to retirement savings. The mutual fund giant Fidelity — the nation’s largest 401(k) provider — says its average 401(k) balance in the fourth quarter of 2013 reached a record high of $89,300, nearly double the market low of March 2009. For those age 55 and older, the average balance is $165,200. Fidelity attributes 78 percent of increase from 2012 to 2013 to the strong stock market.
What now? The performance of the financial markets matters for the average American saving for retirement. As always, Wall Street prognosticators are painting all kinds of persuasive scenarios, from the bursting of a stock market bubble with the end of the Federal Reserve’s tapering to stocks hitting record highs on a strengthening global economy.
What is the average investor to do? Volatile financial storms like the one we’ve just been through are invaluable reminders to review your overall savings portfolio — retirement and non-retirement savings. I’d review the basic questions: Are you well diversified? What is your time horizon for tapping the money? Is your household able to absorb the financial risks in your savings? The key questions aren’t about historic averages and reasonable prognostications. It’s all about you and your particular circumstances. You want to take a portfolio selfie.
Equally important is expanding your thinking about risks beyond the typical investment returns about volatility and correlations. I’d include other aspects of your life, especially the security of your job and the stability of your income. For instance, a tenured university professor with job security can take on more savings risk than a salesperson on commission. A conversation several years ago between Boston University finance professor Zvi Bodie and Vanguard founder Jack Bogle illustrates the point. The two were discussing risk and diversification. Bodie mentioned that his son-in-law works in finance, a job with plenty of earnings volatility.
Bodie: “I say to him over and over again, ‘You want to be all in fixed income.’ ”
Bogle: “You’re totally right. Did you persuade him?”
Bogle: “I’m amazed, because if you’re in that [finance] business you think trees grow to the sky.”
Bodie: “I was very forceful because he is in charge of my 3-year-old granddaughter who is the most precious thing in my life right now.”
Bodie’s son-in-law created a margin of safety for his family by investing in fixed-income securities to offset the earnings risks built into his job. By broadening your risk horizons, you can better tailor your savings to your current circumstances and future dreams.