Brett Arends’s ROI: The stock market trauma: What COVID-19 means for your 401(k)

Dan Keady, the chief financial planning strategist at money manager TIAA, has some good news and some not-so-good news for all those watching their retirement savings evaporate before their eyes.

The not-so-good news? “The money that should never have been in the stock market—I can’t tell you how that’s going to work out for you,” he says. He’s referring to money you were expecting to need imminently—especially within the next few months. His point: Market turmoil could get better over the next few months or even worse. No one knows.

The good news? For long-term investors, “you have history on your side. Nobody knows when these market events will happen. They do happen. It’s not unusual…. Typically, markets do rebound. We know there were a lot of good things going on economically before the downturn.”

And if you’re still tucking money away every month in your 401(k), events like this can actually help your retirement planning, he adds. You’re getting more stocks for your money every month, because they’re a lot cheaper.

With Thursday’s 2,000+ point crash in the Dow Jones Industrial Average DJIA, +3.56%, it is starting to feel like 2008 all over again.

Or even 1929. Even professionals are reeling.

The Dow has fallen 8,000 points in a month, or 27%.

The plunge during the infamous month of October 1929? Just 20%. Yikes.

At times like this it’s worth recalling what Warren Buffett wrote in the New York Times during the crash of 2008. “The financial world is a mess, both in the U.S. and abroad,” he wrote on Oct. 16 of that year. “In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary. So…I’ve been buying American stocks.”

He added: “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”

Sound familiar?

He added: “Fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”

At the time Buffett was writing, the stock market was doing what it is doing now. The Dow had just fallen 22% in a month.

What happened next? The doomsayers’ worst predictions seemed to come true. The economy got worse—much worse. Millions lost their jobs. Housing prices collapsed and stayed depressed for years. Families lost their homes. And the stock market continued to plunge, well after Buffett had written.

When Buffett wrote his article, the Dow was just under 9,000. On the one year anniversary — Oct. 16, 2009—it closed at…9,871.

A gain of around 10%.

A year after that it was north of 11,000.

“[T]hose investors that panicked in 2008/09 and went to cash missed much of the recovery,” notes Liz Windisch, a financial planner at Aspen Wealth Management in Colorado. In recent days, she says, she’s been reminding clients “stocks are a long-term investment, [and] if you sell now you are locking in your losses.”

“For those investors closer to retirement than college,” she adds, “I remind them that they are still are long-term investors. Retirees don’t take all of their money out of the market the day they retire. Your retirement will most likely last 20 to 40-plus years, and to stay ahead of inflation, one must be invested in stocks.”

Meanwhile Rob Arnott, chairman of fund advisers Research Affiliates and a veteran financial historian, writes to say he’s tapped his firm’s stock market database to see what happened during the worst pandemic in modern history, the infamous Spanish flu of 1918-19.

In a nutshell: Stocks rose.

“[B]etween mid-1918 and mid-1919,” he tells MarketWatch by email, “U.S. stocks rose 30%, most of that in the first half of 1919. The Spanish flu pandemic started (in the U.S.) in June/July [1918], reached a crescendo in October/November, and was winding down by February [1919].”

“So,” he continues, “the market shrugged off the pandemic, even as it killed 675,000 Americans, then took off big-time when it was winding down.”

According to public data, the Dow Jones Industrial Average rose by around 8% during 1918, and another 25% during 1919.

Arnott adds that he personally is not expecting a similar boom in U.S. stocks when this is over, because he considers them to be very expensive by historical standards. His firm much prefers emerging market stocks. “I wouldn’t be shocked if emerging market stocks soar once COVID starts to wind down,” he writes.

As for the infamous crash of 1929, the market fell by nearly half from peak to trough in the fall, but then rebounded by about a half in the months that followed. The real carnage came later, in 1931 and 1932, following a string of disastrous economic policy blunders.

“My immediate counsel for investors who are truly panicking is to note that in general the economy is much more sound than is was in ‘08/’09, and the possible coming recession is likely to be short,” says Liz Windisch. “Much (not all) of this downturn is due to the coronavirus and there will be an end in sight for that. At the end of the day, companies that make up the stock market are in business to make money, and they will again in the future.”