The stock market has certainly been on a roller coaster ride over the past couple of months. Most averages currently stand well below the highs reached earlier in 2011. The financial news media regularly speculate whether we are on the verge of another bear market. Many 401(k) investors are certainly wondering if this is 2008-2009 revisited.
[See 5 Questions to Ask Yourself About When You Can Retire.]
As an investor in your company’s retirement plan, keep these thoughts in mind:
Have a long-term game plan. The best defense is a good offense. Don’t ignore what is happening in the markets and the economy, but don’t react to every market rally or decline either. Rather, start with a financial plan. This should be the basis of your investment allocation for your retirement plan and all of your investments. Your financial goals and risk tolerance should drive your investment allocation.
Time and diversification dampen volatility. A chart used in a recent webinar by JPMorgan Asset Management’s chief market strategist reiterated something that is intuitive to most of us in the investment business: Time and diversification are excellent defenses against market volatility. This particular chart looked at returns from three different types of portfolios: all stocks, all bonds, and an equal mix of the two. One-year returns had the widest range of variation. Going to five-, 10-, and 20-year rolling periods, the variability of returns in all cases became narrower over time. Moreover, the chart illustrated that the 50/50 mix of stocks and bonds never lost money over any rolling five-year period. The chart covered a 60-year time frame ending June 30, 2011.
Was the “Lost Decade” really lost? The news media and others talk about the period 2000-2009 as the lost decade for stocks. This is very true if you were invested in an S&P 500 index fund, in many active large-cap mutual funds and ETFs, or in many well-known individual stocks. But a closer look tells a different story. Well-diversified portfolios holding asset classes such as small- and mid-cap stocks, foreign equities, bonds, and some alternative asset classes did reasonably well over that same time period. While the market drop of 2008-2009 took most asset classes down along with large-cap stocks, that was not true over the span of the decade.
If you need help, get it. Any number of studies has shown that 401(k) participants who use advice do noticeably better than those who do not. Advice might come in the form of a managed account offered within the plan, an online advice tool, or perhaps in-person advice. If you need help with your overall financial situation (including your retirement plan account), look for a qualified fee-only advisor.
Don’t be spooked by what you hear on the news, or even by the volatility that we have seen in the markets lately. Manage your 401(k) account for the longer-term.
Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill. where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisors to provide direct investment and retirement planning advice to 401(k) plan participants. Follow Roger on Twitter and LinkedIn. Roger also blogs at Chicago Financial Planner.
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