Investing in a Volatile Market

The financial markets have gone through some ups and downs over the last few months, and that can make sophisticated investors uneasy. It’s often worse for qualified retirement plan participants, who may not have much experience with markets and investing. Novice investors might be tempted to pull money out of the market and hold it until it seems safe, but they’re just as likely to miss gains as they are to avoid losses. So, what can investors do about market volatility?

First, understand that market ups and downs are inevitable. Financial markets are like an ocean with many events, like economic news, company announcements, unexpected company earnings or losses, interest rate changes, and daily buying and selling. All these events (and many others) create ripples and waves and shift the markets up and down. Here are some other things investors should remember.

Keep a long-term focus. If you’re investing for retirement, you should be thinking in terms of years, not days or months. If you have 10 or 20 years before you’ll be tapping into your funds, and you’ll have more time to ride out any short-term market contractions.

Create a solid plan. As part of your retirement plan, you should establish your risk tolerance and create an investment plan that incorporates your investment goals and your time horizon. Establish an asset allocation framework for your investments that divides your funds between stocks, which are traditionally more volatile, and bonds, which generally provide more stable returns. This diversification helps to protect your manage market volatility in your portfolio.  Diversification does not protect against market risk.

Diversify. Buy many different securities, rather than investing in a single company or security. Make sure you review and rebalance your portfolio regularly to avoid accumulating more of your funds than you’re comfortable within a single asset class.  There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.

Make regular investments. Buying low and selling high is the way to make money, but what happens if you misjudge and buy high and sell low? One way to help manage this is through dollar-cost averaging, which is regularly investing set amounts on a fixed schedule regardless of the price. You’ll buy more shares when prices are low, and less when they’re high. Over time, you’ll average your cost per share, so you account for market fluctuations.  An investor should consider their ability to continue purchasing through fluctuating price levels.  Such a plan does not assure a profit and does not protect against a loss in declining markets.

Educate yourself
Usually retirement plans provide educational materials to help you understand and cope with market volatility. Many plans provide online tools and information and even personalized pension counseling with investment professionals. The Participant Effect^SM provides strategies to plan participants to help them make sound financial decisions. For more information, browse or website, or call 866-625-4611.

Tracking Number: 1-444642
This information was developed as a general guide to educate plan sponsors but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, the plan sponsor will be in compliance with ERISA regulations.