A wild ride might be fun at the amusement park, but when its your retirement money riding on todays volatile stock market, suddenly those spine-chilling ups and downs arent so amusing.
When market volatility tempts you to pull your 401(k) investment out of stock funds, take a step back and remember why you invested in the first place: long-term growth of your retirement savings — exactly what stock funds may bring you in the long run.
Keep your eye on the horizon
Although past performance of the stock market does not indicate its future performance, a drop in the market is generally followed by a period of gains. In fact, over the past 30 years, the market has shown an average gain of 10 percent a year. Fluctuations are a natural part of the market cycle and should not incite panic in the long-term investor. What causes volatility? A dip in the market, or correction, may be caused by changing interest rates, foreign currency fluctuations or news about a companys earnings — things that have limited effect in the long run.
Slow and steady wins the race
Remember the fable of the tortoise and the hare? The hare jumped in and out of the race and eventually lost, while the slow and steady tortoise kept his eye on the finish line and won. The tortoises patient strategy can also work for you.
Sticking with your investments, known as “buying and holding,” gives your money full-time earning potential. If you pull out of the race during a declining, or bear, market, you may miss a possible upswing and sacrifice the good days along with the bad. Rather than minimizing risk, timing the market only increases your risk. As a market falls, you could end up selling low and buying high — the exact opposite of your intentions.
The law of averages
Market fluctuations do have an advantage. By making regular, automatic contributions to your 401(k) plan, you buy more shares of a fund when its price is low and fewer shares when prices are high. The effect is known as “dollar-cost averaging.” Over time, your habit of consistent buying will mean that your average cost per share will be lower than the average price of the shares when you bought them.
For example, if you invested $100 per month for two months and purchased 20 shares for $5 one month and 10 shares for $10 the next month, your average cost per share was less than $7. However, the average price of your shares was $7.50.
Dollar-cost averaging “eases” your money into the market, eliminating the need to watch market trends and time your investment just right. You wont be at risk of buying too many shares at peak price. And, if youre using payroll deductions to fund your 401(k) plan, youre already doing it! But keep in mind, dollar-cost averaging doesnt guarantee a profit or protect against a loss in declining markets.
Stay focused on tomorrow
Maintaining a focus on tomorrow may be the best way to view todays volatile market. Your 401(k) retirement funds are invested to provide potential long-term growth for your retirement savings. With a time frame of 5 to 10 years or more, market volatility will have less effect on the future outcome of your investments.
An investment professional can help you with these three steps by performing a thorough financial review. Once the review is complete, the professional can make a recommendation on the best allocation of your investment portfolio.
So stop worrying, and contact your investment professional today. He or she can help make certain your portfolio is allocated appropriately to ensure a long and successful retirement and help you cope with Market volatility!
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