The COVID-19 pandemic has wreaked havoc on the stock market, with retirement account balances falling across all age groups between Jan. 31 and March 31, 2020, according to new research. But not all investors saw their balances decline by the same amount.
And while it's never good for anyone to see their account balance fall, the fact that younger workers sustained larger losses is actually a positive sign.
Younger workers should experience bigger losses when markets crash
Personal Capital's research revealed that investors in their twenties saw a 12.9% average reduction in their investment account balance from Jan. 31 to March 31, 2020. Those in their 30s saw their accounts fall by an average of 13.8%, while those in their 40s saw an average 12.8% decline.
For those in their 50s and beyond, the percentage-based reduction in their account balance was even smaller. Investors in their 50s saw an 11.7% drop; those in their 60s saw their balances decline by 10.1%; and those in their 70s experienced an 8.5% balance reduction. Finally, those in their 80s only lost 5.8% of their account balance on average.
The fact that the percentage of lost value declined by age is a really good thing because it shows that investors have made the right moves when it comes to asset allocation.
Younger workers are supposed to have more exposure to stocks -- and thus more exposure to risk -- because they have more time for the market to recover than older workers who will need to start accessing their money sooner. Young workers can wait out downturns, while older workers can't because they need the money.
Not only can younger workers better absorb the risk of investing in stocks, they need to do so. That's because the best chance you have of earning reasonable returns year over year so you can build wealth is to take on the risks of investing in the market. After all, these risks are minimal if you build a diversified portfolio, do your research, pick smart investments, and invest for the long term.
The fact that younger workers, as a group, lost more than older workers as the stock market crashed shows they've taken this advice to heart and are invested appropriately. If, on the other hand, younger workers had lost less than their older peers -- especially those in their 70s or 80s -- that would indicate a big problem. It would mean either that younger workers were invested far too conservatively or that older investors were not invested nearly conservatively enough.
Make sure you've got the right asset allocation for your age
Coronavirus has officially caused a recession, so it's very likely there will be more market turmoil, and people of all ages may see more temporary losses. While this can be frightening, it's a good idea to stay the course and keep investing steadily, especially if you're young.
You do want to make sure you've got the right asset allocation, though, so you get exposure to risk appropriate to your age. Although this means you may see some bigger percentage-based declines if you're still young, take heart in knowing that you've got a long time left to see your money grow.