The coronavirus pandemic has wreaked havoc on the stock market and the U.S. economy. Earlier this year, the S&P 500 experienced its worst quarter since 2008, and the Dow Jones Industrial Average experienced its worst first quarter in history.
Many investors have watched their savings plummet over the past few months, but some have been hit harder than others. And there's one age group, in particular, that has been hit hardest of all.
COVID-19's impact on retirement investments
The average investor age 60 or younger saw their retirement account balance drop by at least 10% between the end of January and the end of March, a survey from Personal Capital revealed. But different age groups experienced different losses, with some being relatively unaffected and others seeing drastic losses.
Investors in their 30s were the most affected, the survey found, with the average 30-something seeing their retirement account balance drop by around 13.8%. Investors in their 80s were the least affected by COVID-19, with their account balances dropping by just 5.8%.
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Younger investors, in general, were hit harder than those who are older, which is actually a good sign for one important reason.
The importance of asset allocation
The reason younger investors are more affected by the recent stock market crash than older adults likely has to do with how their investments are allocated. When you still have decades until you plan to retire, your portfolio is likely focused more toward riskier investments like stocks so that your savings grow as quickly as possible. Then as you get older, your portfolio should gradually shift toward more conservative investments such as bonds to limit your risk as you get closer to retirement.
When you're younger and are investing heavily in stocks, you are more at risk of seeing your account balance decline sharply during market downturns. However, because you still have plenty of time to continue investing, your savings should recover long before you're ready to retire. Older investors don't have as much time to recover, so as you get closer to retirement age, you should play it a bit safer and focus more on conservative investments.
It makes sense, then, that younger investors were hit harder when the stock market took a turn for the worse, because they likely have more money invested in stocks while older investors may have their portfolios weighted more toward bonds.
What to do if your investments took a hit
If your retirement account balance took a nosedive earlier this year due to COVID-19, you might need to take action or simply ride out the storm.
For younger investors who still have decades until retirement, your best bet may be to stay the course and keep investing as usual. The stock market may be volatile right now, but it will stabilize eventually. And although it can be daunting to continue investing in stocks even during periods of uncertainty, playing it too safe right now could hurt your long-term savings.
If you're close to retirement age and your investments have experienced a significant decline, you might need to rethink your asset allocation. It's normal for your account balance to decrease, but if your savings have been decimated by the recent market crash, you might be investing too heavily in stocks.
There's no magic formula to determine how much you should be investing in stocks versus bonds, because it depends on your age, your risk tolerance, and how close you are to retirement. But if you're nearing retirement age and your account balance has experienced a larger-than-average decline, there's a chance you might need to adjust how your investments are allocated -- especially if the stock market experiences another crash in the near future.
Nearly everyone has been affected by the coronavirus pandemic in some way, and younger investors, in particular, have watched their retirement savings take a tumble. By understanding how asset allocation affects your investments, though, you can make sure you're doing everything possible to keep your retirement on track.