Market Volatility for Retirement Plan Participants
How you should think about recent stock market activity
In recent years, U.S. Stocks have experienced the longest bull market on record, and investors have become accustomed to portfolio returns that are higher than what has been historically expected. But with some volatility returning to markets in early 2018, followed by several notable drawdowns in the last few months of the year, many Americans are increasingly revisiting their 401(k) holdings with some level of anxiety. If you, like many Americans, are a 401(k) participant, should you be doing anything? We’ve answered a lot of questions for our clients recently, so here I’m sharing a few that we have heard the most.
It’s discouraging to look at my balance right now—why should I keep contributing dollars out of my paycheck?
Don’t let market volatility discourage you, and remember that your retirement account balance is just a snapshot in time that is likely many years away from when you’ll ultimately be beginning withdrawals. We typically explain to participants in our plans that unless they need every dollar they have that day, then downside volatility should be looked at as a buying opportunity. It’s like having a coupon for your retirement!
We frequently hear headlines after big market downturns such as “Warren Buffet lost $30 million because of markets today”, but the reality is that, because Warren Buffet is a seasoned investor, and he has previously been quoted as saying investors should “be fearful when others are greedy and greedy when others are fearful”, he is not very likely to be bemoaning a loss. It is far more likely that he views this turn as an opportunity to buy at a better price. Take this philosophy to heart when balances are grim and remember that contributions made while markets are down are ultimately investing in your long-term goals at a short-term discount.
Am I still using the right funds, or do I need to make changes?
Our experience, and something we regularly hear from our investment committee, is that market drawdowns are more common than many people realize, and rarely do they expose underlying issues in long-term asset allocation. What this means to the average person with a retirement account is that they should be thinking more about their overall asset allocation than the individual funds they hold. If you are a “hands-off” investor who relies on target date funds or has funds selected for them based on their risk tolerance, do you think your time horizon and risk tolerance are accurate? If you are choosing your own investments, have you ever taken time to make sure they truly line up with your needs?
Our team strongly encourages participants to use some type of asset allocation solution, whether it be a fund vehicle that helps you select your asset allocation (such as target date funds), or a model portfolio that helps sort you into the right “mix” of assets. If you’re looking to get started, there are a variety of free calculators online that can help you determine your risk. Once you identify your needs based on risk tolerance and retirement age, you can better understand if you need to change any part of your investment lineup.
What’s the downside of going “more conservative” during a downturn?
It’s a common psychological pitfall to feel that you are protecting yourself by exiting a market as it goes down, but a couple things happen when participants do that. First, and most simply, if you decrease your contribution from your paycheck, it’s very likely that you may forget to adjust things back once you are feeling confident in the market again.
Secondly, I frequently see that when people take money out of the market, the timing is unlikely to be favorable, causing them to miss out on the upswing as the market corrects. To illustrate this point, here is a chart showing how overall returns would suffer if an investor missed the 10, 20, 30, or 40 best days over a 15-year period. This leads to underperformance over time.
Just remember, at the end of the day, your approach to saving for retirement should be thoughtful and long-term, and that short-term volatility is common along the way. If you are interested in arming yourself with more information for the next market downturn, attend employee education sessions offered by your company, or reach out to the plan’s advisor.