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Retirement Plan Investing During Volatile Times

Retirement Plan Investing During Volatile Times

| June 07, 2021

Often during periods of market volatility, our clients have questions and concerns on what action they should be taking to protect their retirement savings. Watching your portfolio swing up and down over a short period of time can be unsettling for some investors. While each investor has their own unique goals, time horizon and tolerance towards risk, there are some general ideas everyone can keep in mind during volatile stretches in the market.

  1. Continue to make contributions to your retirement plan
    One of the most common mistakes an investor for retirement can do is to stop contributions over the fear of “losing money” due to market volatility. This can put a huge damper on retirement savings. Missing out on 3 months, a year or more of contributions, when considering compounding of interest and gains on those contributions, can become detrimental to having enough money to live comfortably in retirement.

  2. Stay Invested
    Another common mistake that investors will make during volatile periods in the market is moving all their retirement plan assets to cash. This is a quite common approach with the thought process being that it will stop the short-term losses they are experiencing in their portfolios. While this is understandable, there are several factors that investors should also consider. Purchasing power tends to decrease over time due to inflation. Inflation is the rising cost of goods and services. Moving all your retirement assets to cash, although not losing monetary value, will more than likely lose purchasing power as the average inflation rate is around 3% annually. In simple terms- next year it will cost $1.03 to buy the same $1 worth of goods this year. It’s also important to consider the opportunity cost of moving to cash. Although in the short term holding all cash may prevent losses, but being on the sidelines, investors will not take part in any of the gains of the overall market. This is important to consider, that missing just a few of the best days each year, can drastically decrease the overall return of a portfolio. An investor should reassess their risk tolerance, and possibly become more conservative or aggressive as market volatility occurs but moving to cash may hurt more than it helps.

  3. Dollar Cost Average
    If you are a participant in a 401(k) or 403(b) you may already be implementing this strategy and not even know it! This builds off the first two tips of continuing contributions and staying invested. Dollar Cost Averaging is the process of making multiple purchases of the same fund over time, instead of all at once. Let’s use an example to illustrate this. Kelly makes consistent contributions to her 401(k) twice a month through a payroll deduction. Kelly invests in the target date fund inside of her 401(k) plan. Each time she contributes, she is buying shares of this target date fund. Over 4 months, Kelly invested $1,000 into this target date fund, or $125 per paycheck. Kelly bought into this fund 8 different times, at all different prices, accumulating 50 shares with an average cost of $20 per share. If Kelly were to have invested that same $1,000 all at once, she may have paid $25 per share, which would have only gotten her about 40 shares. By dollar cost averaging, it smooths out the peaks and valleys in the market, and in Kelly’s case, provided her with more shares to build on towards retirement. Often, we see investors move to cash during market downturns then move all their assets back into the market when it begins to swing back up. This example illustrates that with the right risk tolerance and consistency, dollar cost averaging can be a beneficial tool to utilize for the long-term retirement investor.

Investment advice offered through Marshall & Sterling Wealth Advisors, Inc., a registered investment advisor. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.