Protecting 401(k)s and Afores During Financial Crises

During times of COVID-19, not only do we have to protect our health but also our money. Investors seeking advice to protect their retirement plans search for the best options in today’s troubling times.

Since the beginning of the year, stock markets around the world have seen unstable movements causing panic in Wall Street and among investors. For example, the S&P 500 was down 25.82 percent for the year, while NASDAQ suffered its largest percentage drop in history – a 12.3 percent plunge – and the Dow Jones industrial average fell almost 3,000 points. This drop was considered the biggest one-day plunge ever, not seen since the "Black Monday" crash of 1987, reports Investor’s Business Daily.

Considering these grim figures, investors are worried, confused and very much afraid. Nevertheless, taking the best financial decision possible to protect retirement plans will for now bring peace of mind.

Currently, people are wondering if they should cash out their 401(k) assets in stocks or if they should move them to safer holdings. Financial experts say it depends on investor’s age and financial situation. For example, if the investor is young or about to retire, advisors recommend to leave the 401(k) funds alone and take a look at the asset mix, which means knowing how much of the investor’s money (portfolio) is in stocks versus bonds. They recommend to Invest mainly in stocks and stock mutual funds. This means that the investment game plan is long-term in nature and there is a possibility of bouncing back from the market’s roller coaster ride, advisors say.

It is commonly known that stocks generally protect peoples’ 401(k) in the long run. Despite financial crises that could arise, many stocks have bounced back over time. "Given time, stocks have always rebounded from downturns like the tech bubble, wars, the Great Recession, natural disasters, political issues," said Samantha Azzarello, Global Market Strategist on the J.P. Morgan Asset Management Global Market Insights Strategy Team.

Azarello does not recommend investors to anticipate the market’s upward and downward movement with their mutual funds as it could greatly affect investment results. "Studies show that mutual fund investors who try to do that tend to end up selling low and buying high," Azzarello said.

For those who are lucky and plan to retire sooner, the advice is to set aside the money in safer investments or cash, reports Investor’s Business Daily. “You should do that before a market downturn strikes — not because you own a crystal ball that foretells the future, but just as a routine step in your plan, once you get within one or two years of your expected retirement,” says Matt Fleming, Senior Financial Advisor with Vanguard's Personal Advisor Services.

For Mexicans with Afores, the story is not much different. In a report published in El Economista, it says that the investor should avoid as much as possible making partial early withdrawals from individualized accounts. This is because overtime, it spells a loss of money if there is a habit of voluntarily withdrawing savings from the retirement account. During the length of the pandemic, banks advise clients to use their telephones or Afore’s digital services to make any consultation and avoid leaving home. The AforeMóvil app provides services that will allow the user to check the account statement, as well as the voluntary contributions made by the employer.

While Afores seem to be in good standing as of today, the Mexican Stock Exchange (BMV) has experienced troubling times. As a result of the financial and political situation Mexico faces, most Mexican investors have decided to place their asset portfolio outside of Mexico, according to UBS and Credit Suisse surveys. This is bad news for BMV. El Economista reports that BMV will have an even worse performance in the next 12 months. As of this year, the BMV index has dropped almost 16 percent.

Investors surveyed by Credit Suisse and UBS say that rather than investing in the BMV, there are better options to invest – such as metals, US stocks and international bonds. Credit Suisse surveyed 90 financial experts on Mexico’s economy and 37 percent say they expect to have a much lesser return in the next 12 months on investments in BMV, while 34 percent believe they will get higher returns and 7 percent have no idea how the markets will respond. Foreign investors are even more pessimistic. Forty-three percent of those surveyed have a poor outlook for the BMV over the next 12 months, while 31 percent say a rebound is possible. Thirty percent say the market will stay the same and 13 percent does not know.

UBS reports that 61 percent of Mexican investors believe the worst of COVID-19 will end by June and 18 percent think it will end by September. For many investors in Mexico, their main concern, even greater than COVID-19, is the possibility of a further devaluation of the Mexican peso. This is why, perhaps, almost 70 percent of Mexican investors say that the US is the best option to invest their money, according to the report.