Here’s what millennials need to know about market corrections

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Here’s what millennials need to know about market corrections

The market has definitely hit a speed bump, thanks to coronavirus fears.

The Dow Jones Industrial Average, an index that tracks the stocks of 30 large U.S. companies, experienced a market correction on Thursday. This happens when a major index falls at least 10% from its record high. In this case, the Dow closed at 25,766.64, down more than 10% from its record close.



On Thursday, the Dow dropped 1,195 points, or 4.4% from the previous day’s close, following days of volatile markets in which investors have fled equities on fears that the coronavirus, COVID-19, will continue to spread and have widespread economic impact. The other two major market indexes, the S&P 500 and the Nasdaq Composite, dropped 4.4% and 4.6%, respectively.

That drop means your investments, including your 401(k), likely took a hit — over 66% of millennials have investments of some type.

About a third of millennials invested in a taxable brokerage account last year, while another third also had a retirement account, according to a study of over 1,800 millennials (ages 23 to 38) sponsored by CFA Instituteand the FINRA Investor Education Foundation.

But before you panic, it’s worth noting that corrections are fairly common. Investment firm Guggenheim Funds looked at market pullbacks of the S&P 500 since 1946, finding that market corrections with declines of between 10% and 20% happen about 2.5 times each year on average. It’s also important to keep in mind that a correction is a less severe than a bear market, which occurs when the market falls by 20%. We’re not there yet.

“Investing should never be about a moment in time; it should always be about a process over time,” Liz Ann Sonders, chief investment strategist at Charles Schwab, tells CNBC Make It.

In fact, Robert Shiller, the Nobel-prize winning economist and Yale professor, says trying to predict the market based on the latest decision by the Federal Reserve or other events is far from a winning investment strategy.


Market downturns may work better for younger investors

Millennials (ages 24 to 39) have a long time horizon for their investments. Most have decades before they retire, so even if a recession hits tomorrow or next year, there’s plenty of time for their investments to bounce back. Recessions and market downturns are part of a normal, healthy market cycle.

In fact, millennials should “cheer” for a correction, says Josh Brown, CEO of Ritholtz Wealth Management and a CNBC contributor. “The absolute best thing that can happen for younger investors would be a stock market that does nothing but drops,” he says.

That’s because younger investors typically don’t have a big lump sum already invested in the market, so they won’t take a huge hit. And they have time to let their investments bounce back, so it’s worth buying stocks and funds now, at a lower price, and sitting on them until they rebound.

Instead, think of a market correction like when stuff goes on sale at your favorite store, Sonders says. If you buy a TV, for example, during Black Friday, you’re typically getting a discount. The same is true with buying stocks when the market is down.

That said, if the current market downturn does turn into a recession, millennials may need to worry about unemployment. When economic growth slows, companies typically generate less revenue and may need to lay off employees. “The bigger risk for millennials is if they lose their job,” Brown says. “That is a way bigger risk for them than the stock market.”

What you should do right now

Experts say the best strategy right now is to keep investing and making regular contributions to your 401(k). This routine influx of money into your investment accounts is actually a strategy that experts call dollar-cost averaging. It’s great for long-term investors because it takes the emotion out of the equation and keeps them from selling out during market lows and buying in at market highs.

The other step you could consider taking right now is rebalancing your portfolio, especially if the recent market swings have you stressed. Your investments can drift off their target allocation when the market shifts up and down, so selling some of your holdings and adding others to the mix can get you back in line with your risk tolerance and your financial goals.

A 401(k) is actually a good place to invest amid market volatility, Sonders says. Typically these are structured so that you’re buying on a regimented basis and many have an automatic rebalancing process.

Last, take a deep breath. Many millennials have strong “muscle memory” from their own involvement, or their parents’ experiences, with the market during the last financial crisis, Sonders says. Yet the reality is that market event was not the rule; it was more on the exception end of the spectrum.


There is such a thing as garden-variety corrective phases — they don’t all look like the 2008 financial crisis, Sonders says.


(Sources CNBC Make-it, Ritholtz Wealth, Sound Mark Wealth, Money.com)


 

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