According to dictionary.com, volatility means "evaporating rapidly; tending or threatening to break out into open violence; explosive; changeable; mercurial; flighty; fleeting; (of prices, values, etc.) tending to fluctuate sharply and regularly,".......Ahhh, there we go! Fluctuating sharply! That describes the last several days of the ups and downs of the stock market.
With so much money invested in defined contribution retirement plans, and employees responsible for making critical investment decisions, it is important for organizations that offer employer-sponsored retirement plans, along with their retirement service partners, to continually educate their employees about the importance of long-term investing. Yes, it is difficult and emotional to observe the ups and downs of equity values, but such volatility is part of the journey to a successful retirement. Volatility is certainly a double-edged sword, but downturns in the market represent buying opportunities.
We often tell employees about the importance of saving early, the merits of compound interest, and portfolio diversification. Another key message should be around the benefits of dollar-cost averaging. As employees make regular contributions into their 401(k) plan (or similar vehicle), it is important for employees to remember that their contributions are investing in a system (via payroll deductions) of buying securities at regular intervals, using the same amount of cash for each purchase over a considerable period of time, regardless of the prevailing prices of the securities. This results in having bought the total shares at an average cost. In other words, more shares are purchased when prices are low, and fewer shares are bought when prices are high; therefore, where many people want to "get out of the market" when it declines, it is often better to "buy into the market."
Although it may be true that, for plan participants who are 10 years or less from retirement, they are probably the most vulnerable to market events, reacting to short-term headline news can harm their long-term goals. For those participants saving for a retirement future still a decade or more away, it is even more important for them to stick with their long-term investment goals. Hopefully, if employees have been following a sound asset allocation strategy all along, based on their risk tolerance, time horizon (years to retirement), and retirement goals, swings in the market have been accounted for, so when the volatility does occur, people are prepared and experience less anxiety.
- Keep Doing the Right Thing - Continue to make contributions to your retirement accounts.
- Don't Succumb to the Market Roller Coaster - It is common for people to have an emotional reaction to the market's ups and downs. Emotions change as markets move through their normal cycles. Inevitably, markets move both up and down.
- Think About Risk - Investing is always about finding that delicate balance between our desire for high rates of return with the dread and pain that comes from losing our hard-earned money. Determining the level of risk you're comfortable with is incredibly difficult and sometimes is revealed only when rough times arrive.
- Rebalance Your Investments - Stick with that allocation by rebalancing your investments from time-to-time. Periodic rebalancing is always a good idea,
- Take a Close Look at Your Account - While you're rebalancing your account, take a close look at what's in it. When you allocate your contributions, which investments are they going toward? Do you still feel good about those choices? Your plan might have added new choices since you enrolled. Take a look at those new choices and see if any of them make sense for you.
- Treat Your Account Like a Lockbox - It's tempting to tap into your retirement savings accounts but the penalties and taxes will cost you in the short and long-term. Treat your retirement accounts as a lockbox, only to be opened when you reach retirement.
Resist the temptation to try to time the market, especially when based on emotions. Remaining invested in the stock market is a sound approach, especially for those retirement plan participants with a long time horizon, Historically, over any reasonable period of time, stocks outperform bonds.
Since there will always be things threatening the market, it is important that employees focus on the items they can control, such as how much they are saving and their asset allocation, based on their time horizon and tolerance of risk.
Time is our most valuable asset. Stay invested, keep calm, and ride it out. Volatility is the price you pay for good investment returns.