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6 Rules for Navigating Market Volatility

Even if you're investing for the long term, short-term volatility can be difficult to stomach. Bailing out when the market drops and then missing out on an opportunity for growth when it turns around are classic investment blunders. These are better ideas:

Diversify. Since you don't know which investment is going to do best next, spread your money over several types of investments. Your portfolio can include some mutual funds that invest in stocks and some that invest in bonds, and you can also invest in different types of stocks and bonds - including some that focus on large companies, some on small companies, and some on international firms. You can also diversify your investment strategy, choosing some funds that focus on fast-growing companies and others that search for companies that seem undervalued and ready for a rebound. While diversification does not prevent losses, it can help mitigate overall volatility.

Match your investments to your time frame. If you have several years before retirement, you may be able to weather more market volatility in return for the potential for larger long-term returns. You can generally invest more of your money in riskier stock funds when you are younger and gradually shift more money to bond funds and cash as you move closer to and in retirement.

Rebalance your portfolio. Carefully choose the investments in your portfolio based on your time frame and risk tolerance. But when one type of investment performs better than others, the balance is thrown out of kilter and your portfolio can become riskier than the plan you carefully scripted. Review your portfolio regularly and rebalance every year or so - such as the beginning of the year or on your birthday - or whenever your overall stock and bond investments stray more than a predetermined amount from your target mix. Rebalancing requires discipline. You can either rebalance by selling some of the investments that have increased in value and buying more that haven't performed as well. Or, if you add money to your account with each paycheck, as with a 457 or 401 plan (or IRA), you can direct more of your new contributions to the asset classes that haven't performed as well to get your investments back in line with your original allocation.

Dollar-cost average. Investing a fixed amount of money on a regular basis - such as biweekly contributions to your 457 or 401 plan - takes away the temptation to try to time the market. It also means buying more shares when prices are low, and fewer when prices are up.

Shift your strategy as you near retirement. As you approach the time to start planning for withdrawals, you should shift some of your money to more conservative investments that are less subject to market volatility. Some retirees keep at least three to four years' worth of expenses in a stable value fund, which can help mitigate the impact of market volatility on your savings. Still, since you may live for 20 or 30 years in retirement, you'll want to keep a portion of your savings invested more aggressively for the long term.

Learn more. There are several ways to get help applying these investing concepts. With a target-date fund, such as the VT Vantagepoint Milestone Funds,* investment professionals create diversified portfolios of mutual funds based on different time horizons, with more money in stock funds and less in bond funds when you're young, and gradually shifting to more conservative investments as you get closer to retirement. Or, you can talk with an ICMA-RC representative about the investment options available to you. See additional resources at the Retirement Education Center.

*A target-date fund is not a complete solution for all of your retirement savings needs. An investment in the fund includes the risk of loss, including near, at, or after the target date of the fund. There is no guarantee that the fund will provide adequate income at and through an investor's retirement. Selecting the fund does not guarantee that you will have adequate savings for retirement.