This article originally appeared on ABGSW.com. Alliance Benefit Group Southwest is a subsidiary of REDW LLC and serves as the firm’s trusted group of retirement plan advisors.
With the market’s volatile start to the year, it’s understandable why plan participants may be concerned.
It’s often the fear of the unknown that causes individuals to act on emotion and make decisions they may later regret. Right now, we are facing continued market volatility primarily due to increased inflationary pressures, higher interest rate expectations, and uncertainty stemming from the Russia and Ukraine conflict.
Although the current geopolitical conflict will likely contribute to increased short-term market volatility and higher energy prices, historically, geopolitical crises do not generally have sustained, long-term market consequences. To demonstrate this point, consider a review of twelve historical events that included, the 2003 Iraq War, 1979 Iranian hostage crisis and the 1962 Cuban missile crisis, among others. In nine of the twelve events, the market as defined by the S&P 500 Index, was higher a year later, with an average gain of 8.6%.1
Below are three strategies that can help protect a retirement plan from unavoidable market volatility:
THE IMPORTANCE OF A DIVERSIFIED PORTFOLIO
Times of increased market volatility come as an important reminder to maintain a diversified portfolio that is not concentrated in any specific geographic region or asset class. This may decrease risk while simultaneously increasing the potential for investment returns. Diversification may reduce the severity of market fluctuations since different assets classes have varying degrees of correlation with each other and, therefore, experience different returns. Holding a variety of asset classes may reduce the likelihood that any one asset class may have a disproportionate adverse effect upon a plan participant’s retirement portfolio.
STAYING IN THE MARKET IS MORE IMPORTANT THAN TIMING THE MARKET
Often the key to investment success is to stay invested during periods of volatility and not try to time the market. Take a look at the chart below. Over the past 20 years, $10,000 invested in the S&P 500 Index has grown to over $60,000. However, if an investor missed the 10 best days of market performance over that time frame, their investment would be less than half that amount. And if they missed the 20 best days, their investment return would have been 72% lower.
THE POWER OF PORTFOLIO REBALANCING
Portfolio rebalancing can be a powerful tool for retirement participants. It is a great way for participants to stay true to a particular risk profile and with regular frequency alter their asset allocation, as appropriate, to enable them to stay on track to meet their long-term goals. Many retirement service providers have automatic rebalancing options available that can give participants a more “hands-off” approach.
Market volatility is a normal occurrence when investing in the stock market. It is important to remind participants that having a disciplined approach and staying the course are often the best tactics for long-term success.
If you have questions regarding communications to plan participants and employees during periods of heightened market volatility, please reach out to your trusted ABG Southwest relationship manager. Or Contact ABG Southwest.
1 Truist Advisory Services – https://www.reuters.com/markets/europe/markets-churn-over-russia-ukraine-conflict-history-shows-fleeting-impact-2022-02-14/