Market Volatility and Your 401k:
It is easy to get caught up in all of the headlines lately regarding the economy and the stock
market. But it is important to remember that during market volatility you may need to remain
steadfast in your investment strategy. Don’t make 401k decisions based on short-term trends or
emotions. Don’t abandon your investment strategy. If you try to play catch-up later it can result in
even greater risk. The best approach is to maintain a long-term disciplined investment
approach. Here are some principles to investing in your 401k in a volatile market.
Have a firm investment strategy. If you have an investment strategy, you have already clarified
your time horizon, your goals and your tolerance for risk. Living with market volatility is a lot easier
when you have this investment strategy is in place. If you don’t have an investment strategy
consider these questions. How many years do you have left until you plan to retire? What is your
retirement goal? How much do you need to accumulate in your 401k to create the income you
need in retirement? Do you have retirement investments outside of your 401k? What is your
tolerance for risk? Look at the whole picture to determine whether your strategy should be
aggressive, conservative or somewhere in between.
Match your investments to your comfort level. Even if you time horizon is long enough to
warrant an aggressive growth portfolio, you need to make sure you are comfortable with the short-
term ups and downs. If watching your plan balance fluctuate will affect your health and well-being,
think about a portfolio that feels right and set realistic expectations. If you want less pressure on
yourself and prefer a more hands-off approach, consider a lifecycle fund if your 401k plan offers
this type of fund. These funds offer management assistance by providing investments that
represent various asset classes and investment styles in a single fund based on a single
retirement date. Choose the one fund with a date closest to the year you plan to retire. The
investments are rebalanced on an ongoing basis to become more conservative as the fund
approaches its target retirement date and beyond and you can leave all of the rebalancing to the
fund.
Diversify, diversify, diversify. Protect yourself from market downturns by owning various types
of investments. Spread your investments across the three asset classes – stocks, bonds and
short-term investments. Then to help offset risk even more, diversify within each asset class (e.g.
large cap, mid cap, small cap, value, growth, domestic, international). Keep in mind that
diversification doesn’t ensure a profit or guarantee against loss. For help with diversification use
www.morningstar.com.
Invest for the long term. Market declines are a normal part of the investment process. Expect
them. View the market downturn as a buying opportunity. Don’t make long-term decisions based
on short-term market events. Focus on long-term trends and your long-term goals. Through dollar
cost averaging, you continue to put a set amount into your 401k regardless of how the market is
doing. Over the years, your money buys more units of each investment option when prices are
low and fewer when the prices are high. You end up with an averaged return that could be higher
than if you invested your money all at once. You also avoid the temptation of the next principle –
timing the market.
Don’t try to time the market. Avoid predictions. No one, including the media and the “experts,”
knows exactly where the market will go from here. “What if” and “perhaps” should never be the
basis for investment decisions. Don’t try to guess what may happen. Trying to buy or sell
investments at precisely the “right time” can really cost you. Most of the market’s gains occur in
just a few strong, but unpredictable, trading days here and there. To benefit from the market’s
long-term performance, you need to be in the market on those days. You need to invest for the
long run and stick with it throughout the ups and downs. The key long-term investment strategy is
not to time the market, it is TIME in the market.
Stay calm and stay invested. Review your investment objectives. If your portfolio is off balance
from your original plan, make the necessary adjustments. You should do this once a year.
Maintain realistic expectations. By investing regularly in your 401k over months, years and
decades, you can actually benefit from a volatile market.
It is important to understand how the actions you take today will affect your account on
a long-term basis.
Disclosure: Stocks are subject to market loss including the potential loss of principal invested. Diversification does not assure a profit and
does not protect against loss in declining markets. Past performance does not assure future results.
market. But it is important to remember that during market volatility you may need to remain
steadfast in your investment strategy. Don’t make 401k decisions based on short-term trends or
emotions. Don’t abandon your investment strategy. If you try to play catch-up later it can result in
even greater risk. The best approach is to maintain a long-term disciplined investment
approach. Here are some principles to investing in your 401k in a volatile market.
Have a firm investment strategy. If you have an investment strategy, you have already clarified
your time horizon, your goals and your tolerance for risk. Living with market volatility is a lot easier
when you have this investment strategy is in place. If you don’t have an investment strategy
consider these questions. How many years do you have left until you plan to retire? What is your
retirement goal? How much do you need to accumulate in your 401k to create the income you
need in retirement? Do you have retirement investments outside of your 401k? What is your
tolerance for risk? Look at the whole picture to determine whether your strategy should be
aggressive, conservative or somewhere in between.
Match your investments to your comfort level. Even if you time horizon is long enough to
warrant an aggressive growth portfolio, you need to make sure you are comfortable with the short-
term ups and downs. If watching your plan balance fluctuate will affect your health and well-being,
think about a portfolio that feels right and set realistic expectations. If you want less pressure on
yourself and prefer a more hands-off approach, consider a lifecycle fund if your 401k plan offers
this type of fund. These funds offer management assistance by providing investments that
represent various asset classes and investment styles in a single fund based on a single
retirement date. Choose the one fund with a date closest to the year you plan to retire. The
investments are rebalanced on an ongoing basis to become more conservative as the fund
approaches its target retirement date and beyond and you can leave all of the rebalancing to the
fund.
Diversify, diversify, diversify. Protect yourself from market downturns by owning various types
of investments. Spread your investments across the three asset classes – stocks, bonds and
short-term investments. Then to help offset risk even more, diversify within each asset class (e.g.
large cap, mid cap, small cap, value, growth, domestic, international). Keep in mind that
diversification doesn’t ensure a profit or guarantee against loss. For help with diversification use
www.morningstar.com.
Invest for the long term. Market declines are a normal part of the investment process. Expect
them. View the market downturn as a buying opportunity. Don’t make long-term decisions based
on short-term market events. Focus on long-term trends and your long-term goals. Through dollar
cost averaging, you continue to put a set amount into your 401k regardless of how the market is
doing. Over the years, your money buys more units of each investment option when prices are
low and fewer when the prices are high. You end up with an averaged return that could be higher
than if you invested your money all at once. You also avoid the temptation of the next principle –
timing the market.
Don’t try to time the market. Avoid predictions. No one, including the media and the “experts,”
knows exactly where the market will go from here. “What if” and “perhaps” should never be the
basis for investment decisions. Don’t try to guess what may happen. Trying to buy or sell
investments at precisely the “right time” can really cost you. Most of the market’s gains occur in
just a few strong, but unpredictable, trading days here and there. To benefit from the market’s
long-term performance, you need to be in the market on those days. You need to invest for the
long run and stick with it throughout the ups and downs. The key long-term investment strategy is
not to time the market, it is TIME in the market.
Stay calm and stay invested. Review your investment objectives. If your portfolio is off balance
from your original plan, make the necessary adjustments. You should do this once a year.
Maintain realistic expectations. By investing regularly in your 401k over months, years and
decades, you can actually benefit from a volatile market.
It is important to understand how the actions you take today will affect your account on
a long-term basis.
Disclosure: Stocks are subject to market loss including the potential loss of principal invested. Diversification does not assure a profit and
does not protect against loss in declining markets. Past performance does not assure future results.
Personal Finance and Wellness
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