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Market Volatility & Your Retirement Plan Account
What is “market volatility”—and how can it affect your retirement savings account?
Generally speaking, the phrase “market volatility” refers to the unpredictable daily changes (large and small) in the prices of stocks and bonds. The term volatility is also used to describe certain types of investment vehicles. For instance, if the price of a stock moves up and down rapidly over short time periods, it has high volatility. If the price almost never changes, it has low volatility.
As a retirement plan participant, market volatility impacts your account if you invest in a stock or bond fund. The value of your fund will go up or down, based on daily changes in the financial markets.
What causes market volatility?
There are many factors, such as:
- the state of the economy (domestic and global);
- world events;
- taxes;
- industry changes;
- political turmoil;
- natural disasters; and
- war.
… to name just a few.
How can I fight volatility?
While you can never eliminate market volatility, you can make some smart moves to help yourself deal with it. Many experts agree that asset allocation—spreading your money across different asset classes (stocks, bonds, and cash equivalents)—is a good way to help manage some of the risks of investing. And taking that a step further by diversifying your investments within each asset class (large-cap stocks, small-cap stocks, long-term bonds, short-term bonds, etc.) can help limit volatility with investment returns while managing your investment risk. That’s because different investment types tend to move in different cycles; when one kind of investment is up, another type may be down.
Having a variety of asset classes in your portfolio may enable you to better weather the rough spots in the market. The mix of investments that’s right for you will depend on your age, your retirement time horizon, your investment objectives, and your risk tolerance. Keep in mind, however, that asset allocation does not guarantee a profit or protect against a loss.
Is there such a thing as the “perfect investment?”
The key to investing for retirement is remembering to look at the big picture. It isn’t just about trying to predict the performance of one particular investment option or worrying about losing money in your retirement account. It’s about investing regularly in a variety of options over a period of time and taking advantage of those ups and downs in the market.
Here are some impressive statistics that show how important it is to stay invested in the markets throughout all market conditions: Equities, as measured by the S&P 500® Index between 1982 and 2001 enjoyed an 11.8% return (Past performance does not guarantee future results). The end result is that an original $10,000 investment—if it stayed in the market—grew to $93,075.*
But what about an investment of $10,000 during that same time frame that left the market for some of that time—even for small periods? Here’s what happened to the account balances of investors who missed a certain number of the market’s best-performing days over that 20-year period. Instead of their account winding up with $93,075:
- Those who missed the 10 best days had an account balance worth $56,044 ($37,031 less).
- Those who missed the 30 best days had an account balance worth $28,144 ($64,931 less).
- Those who missed the 50 best days had an account balance worth $15,781 ($77,294 less).
These figures show how important it can be to stay invested in the markets—and not let your emotions get the better of you.
So what can you do?
Take a look at the investment options offered by your retirement plan and choose the ones that you feel are the most appropriate for you and your long-term goals. Keep in mind that application of asset allocation and diversification concepts does not ensure safety of principal and interest. It is possible to lose money by investing in securities.
I’m worried about losses. What can I do?
Consider creating a long-term investment strategy—and sticking to it. Have you ever been on a boat in rolling seas? An old sailor’s trick for easing the queasiness in your stomach is to keep your eye on the distant horizon and not focus on the swells beneath your feet. It’s the same with market volatility. Keep your eye on your long-term goals and don’t react to short-term market swings.
You can make yourself crazy by watching the daily fluctuations in both the markets and the value of your retirement plan account. Try not to make drastic portfolio changes based on current market conditions. Remember: You don’t want to miss any of the market’s “best days.” Selling off poorly performing investments will turn a potential short-term loss into a permanent one. Although past performance is no indication of future results, history shows us that markets tend to recover, even if it takes a year or more to do so.
But shouldn’t I still keep an eye on my retirement plan account?
Absolutely. Even with a long-term strategy in place, it’s important to review your portfolio periodically to make sure it’s keeping pace with your life and your goals. The birth of a child, or sending one off to college, can change your financial priorities. It’s important that your financial strategy reflect your current circumstances, so be sure to review your financial goals and your asset allocation at least annually. Even if you haven’t had any life-changing events recently, you may need to rebalance your portfolio to bring it in line with your original intentions if there have been significant shifts in the markets.
Position yourself for your future…
There are several ways you can help yourself prepare for a better tomorrow. Here are just a few:
- Be sure to check your asset allocation from time to time to make sure it’s still in line with your long-term goals and investor style. To take an informative online asset allocation course, visit www.prudential.com/prep.
- Contact one of our Retirement Counselors** at 800-992-4472—for great ideas on various ways you can maximize your retirement savings strategy.
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