5 Tips for Financial Wellness in Volatile Markets

Current global fears about the coronavirus COVID-19 in recent weeks have been brutal to the market sending stocks plunging. We understand that seeing your retirement investments being taken on a rollercoaster ride can be an unnerving and scary experience. But here’s the thing: Big swings in market returns have been happening since the dawn of investing. We don’t know how long the current downturn will last, however, over long periods historically, returns on equities (stocks and stock funds) have been positive overall.

In Volatile Markets, Keep a Steady Hand on Your Retirement Investing

So, what to do when the market news frays your nerves?  The first thing to do is take a deep breath. Then, focus on the following key principles of smart investing for retirement.

1. Long-Term Investing Requires a Long-Term Perspective

Try to resist changing your investment strategy in a reflexive reaction to short-term results in financial markets. Your approach to retirement investing should reflect a long-term view. This holds true even if you plan to retire within a few years. After all, you won’t spend your entire nest egg on the day you retire; you’ll want to keep most of it invested as a generator of growth to carry you through the rest of your life. And the rest of your life is likely to be a long time. According to the Social Security Administration, the average man who is age 65 today is expected to live to age 84, while the average woman who is age 65 today is expected to live to age 86.5.

2. Stay True to Your Asset Allocation

Remain focused on your retirement asset allocation – the blend of different asset classes (investment categories), including equities, fixed-income investments (such as bonds) and cash equivalents (money market instruments), in your portfolio. At least once a year – more often if your life circumstances change significantly – make sure your asset allocation is still tailor-made for you. In other words, do you still have the right blend and proportion of asset classes, given your retirement goals, time horizon, return objectives and risk tolerance?

When making decisions about retirement investing, remember that if your long-term return fails to exceed the inflation rate over the same period, the purchasing power of your nest egg will be eroded. Inflation risk can be just as detrimental to your future retirement security as market risk, which is the possibility of realizing a loss on your investments.

3. To Reduce Risk, Diversify

You expose your savings to unnecessary risk if your retirement portfolio contains too many “eggs” in one “basket.” You’re better off diversifying, which means investing in a variety of assets. The main goal of diversification is to reduce the impact that a loss on any one asset – for example, the stock of one particular company – could have on your overall portfolio.

Mutual funds and funds offered by workplace savings plans provide you with instant diversification by investing their pooled money in a professionally chosen set of multiple assets. You get even more diversification when you invest in more than one fund, although a “target-date” or “balanced” fund may work well as your sole investment for retirement if, by itself, it aligns closely with the asset allocation you want.

4. Consider a Cash Cushion for Emergencies

At all times, you should have a ready source of cash to dip into in the event of an emergency, like a job loss or major home repair. On average, you’ll need enough cash on hand to cover at least three to six months of basic living expenses. Keep the reserve in a safe and easy-access account, like a money market fund.

5. Don’t Try Timing the Market

When assets in which you’ve invested for a long-term goal head downward, you might wonder, “Should I get out of the market now and jump back in later when things get better?”

Generally, the answer is no – you’re better off holding tight.

Even if you’re currently seeing losses on your retirement account statements, remember that for now, they’re only paper losses. They won’t be realized losses unless you lock them in by selling today. And when you move your money in and out of investments in an effort to catch only the performance highs and avoid the lows, you’re playing a high-risk game known as “timing the market.”

Even investment pros are rarely able to successfully time the market. Case in point: Investors who remained fully invested in the S&P 500 from January 1, 1999 to December 31, 2018 would have achieved a 5.62% annualized return. However, if trading had caused these investors to miss the S&P 500’s 10 best days during that same period, their annualized return would have been a disappointing 2.01%.

So, what’s the bottom line here? Don’t let volatility in financial markets keep you from staying the course in pursuit of your retirement goals.