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Opinion: Yes, you can use this crazy market to help your 401(k)

MarketWatch logo MarketWatch 3/26/2020 Brett Arends

If you’re among those kicking yourself for not having the foresight to sell all of your stocks a month ago, don’t.

Instead, congratulate yourself on your wisdom and foresight for hanging on.

That is not because of the monster rally of the past few days, which has clawed back just a small portion of the trillions lost.

It’s because while your stock portfolio may be down, many other investments, which you could usefully buy, are down even further. And that means you suddenly have a golden opportunity to redo your portfolio, broaden your risks and improve your diversification. And you’re better off doing it today than you would have been last month.

Consider: If you’re like most regular U.S. investors, you have most or even all of your stock market investments tied to just one index: The S&P 500 which tracks the 500 biggest companies in America.

It’s the biggest index in the world, and the one that most mutual funds follow when they offer a plain vanilla “U.S. stock market fund.”

In the past month the S&P 500—even counting the latest rally—has fallen 17%.

But during the same period of time, U.S. small-company stocks, as measured by the Standard & Poor’s 600 Small Company Index (SML) have fallen 26%. So if you transfer some money today from your S&P 500 fund such as the SPDR S&P 500 (SPY) to a U.S. small cap fund, such as the SPDR S&P 600 (SLY) you’ll actually get a much better deal than you would have done a month ago.

And it’s the same for almost everything else. Real-estate investment trusts or REITs, both in the U.S. and overseas, have fallen by much further than the S&P 500. So you’ll get more, say, Vanguard Real Estate (VNQ) and Vanguard Global ex-U.S. Real Estate (VNQI) than you would have done in February. “International” funds, which invest in the MSCI EAFE index (XX:990300) of developed overseas markets of Europe, Australasia and the far East, and “emerging markets” funds that invest in places like China, South Africa and Brazil, are all much cheaper than they were a month ago. U.S. investors switching their money into funds such as iShares Core MSCI EAFE ETF (IEFA) SPDR Portfolio Emerging Markets ETF (SPEM) and Vanguard FTSE All World ex U.S. Small Cap (VSS) are getting a comparative bargain.

Related video: What not to do with your 401(k) in an unstable market (provided by Pennygem)


They’ve all fallen by more than the S&P 500. In most cases, by a lot more. So the portfolio do-over is actually a better deal now than it was in February. You just got a discount.

If you want to look at individual markets overseas—and it’s not necessary—the scale of the crash is hard to fathom. Since 1988, for example, the economy of Taiwan has quadrupled. But this week the Taiwanese stock market went back to the levels it was at when Ronald Reagan was U.S. president.

The Japanese and Italian stock market indexes this week also fell back to 1980s levels. Germany’s fell to the late 1990s. South Korea and Australia were back to the mid-2000s.

Those who think investments other than the S&P 500 are “too risky” or are best left to professionals have it exactly upside down. The bigger risk is tying all your retirement portfolio to a single index.

Sure, the S&P 500 has been the place to be during some decades, such as the 1990s or the one just past. But during other 10 year stretches the index has been dead money, or worse.

The S&P 500 lost ground from 2000 to 2009. Meanwhile U.S. small-caps rose 85% and Emerging Markets more than doubled. During the 1970s the main U.S. stock index failed to keep up with runaway inflation. But the emerging Asian “tigers” of the era boomed: Japan went up 400% and Hong Kong 800% — really—during the decade. Even during the boom of the 1980s, you were better off investing in Europe and Japan than you were in big U.S. companies.

All of which suggests that when you held on to your big S&P 500 index fund last month you were being wiser than you thought—assuming you want to take advantage of an opportunity to diversify.

Brett Arends is a MarketWatch personal finance writer. Follow him on Twitter @BrettArends.


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