3rd Quarter 2019

Investing Spotlight: Dealing with Stock Market Volatility

Recent stock market volatility has many people concerned about their investments — especially those who may be closer to retirement. And even though the market has performed well over the past several years, nobody can predict when an aging bull market (positive market performance over a certain time frame) will end. It’s important to continue to make sure your investments match your time frame and risk tolerance, and to follow some key investing principles that can help you stay the course in any market.

Keep a long-term perspective. It’s challenging to keep emotions in check while experiencing the stock market’s ups and downs. But if you have decades before you plan to retire, don’t focus on short-term movements in the stock market. Instead, remember how and why you created your portfolio in the first place. Stocks are more volatile than certain other investments over the short term, but historically they have performed better than lower-risk investments over the long term. If you sold those stocks during a downturn over a period of time (also known as a bear market), you’d lock in the losses and miss the valuable gains when the market did turn around.

Let’s compare a hypothetical example of two investors who each started with $10,000 in their account 10 years ago (see chart below). Investor A remained in stocks for the past 10 years. Investor B thought the bull market was too old at five years, and as a result moved into cash after five years. The difference is significant — you’d have about $13,000 less if you moved out of the market and into cash for the past five years. Even though stocks have earned high returns over the past 10 years, no one is certain how long the bull market will last or how stocks will perform in the near future. But it’s important to keep a long-term perspective when choosing your investments.

Source: ICMA-RC. Hypothetical example: Investor A remained in stocks for the past 10 years. Investor B thought the bull market was too old at five years and decided to move into cash. The difference: Investor B saved $13,000 less by moving out of the market and into cash for the past five years.


Follow a dollar-cost averaging plan.1 Dollar-cost averaging simply means that you invest the same amount of money in the same investments on a regular basis. This kind of autopilot approach helps you to stay the course, keep emotions in check, and reduce the temptation to try to time the market. By regularly investing in your retirement-savings plan (such as your 457), dollar-cost averaging can work in your favor. And your dollars may buy even more shares during a downturn, which could grow after the market turns around.

Diversify and rebalance. It’s impossible to predict which investment is going to perform best, so it makes sense to spread your money over several types of investments. While diversification doesn’t insulate your investments from market volatility, a mix should include funds that invest in large-company stocks, some in small-company stocks, and some in international companies, as well as bond funds and cash. If you’re decades away from retirement, you can afford to invest more money in stock funds, which have historically performed the best over the long run. After a period of volatility, it’s particularly important to rebalance your portfolio to make sure that your investment mix still matches your target allocation. Otherwise, your portfolio may end up more or less risky than you intended.

Build a cushion as you approach retirement. In any kind of market, it’s wise to be prepared for short-term expenses so you don’t have to sell stocks at a loss to pay your bills. If you are close to retiring or have already stopped working, estimate how much you’ll need from savings to cover your expenses over the next few years. Then, start moving just that money out of the market and into a stable-value fund, money-market account, or other low-risk account. That way, your funds are accessible and available no matter what happens in the stock market. Moving all of your money into a stable-value fund or cash could expose you to greater inflation risk (the chance that your savings don’t keep up with inflation) and longevity risk (the chance that you’ll outlive your savings). Remember, your retirement could last 20 years or more, so your portfolio should continue to include some longer-term investments as well.

Take advantage of investing and educational resources available through ICMA-RC. With a target-date fund,2 investment professionals create a retirement-savings portfolio based on your investing time frame, and gradually shift into more conservative investments as your retirement date gets closer. Or learn about other approaches — see Choose Your Approach to Investing. Also check out ICMA-RC’s retirement education center (www.icmarc.org/invest), which offers many resources to help you create your portfolio, calculate your needs, and invest for retirement.

1 Dollar-cost averaging does not assure profit or protect against a loss in a declining market. Since dollar-cost averaging involves continuous investing, regardless of fluctuating prices, investors must consider their level of comfort in continuing to invest during a declining market.

2 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.

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