While the criteria used to determine which market periods qualify as “bull” or “bear” can be somewhat nebulous, make no mistake about it – we are currently enjoying one of the longest bull runs in market history. Most analysts agree that the present bull market celebrated its 9th birthday in March, and there’s little reason to think that stock indices themselves can’t continue to rise over the long-run. In spite of generally positive economic conditions, however, there is reason to suspect the return of a familiar and at times uncomfortable and challenging force in the market: volatility.
Preparing For Volatile Markets
In early February of this year, the stock market endured its first true correction in a couple of years. Generally defined as a 10 percent price dip from bull market highs, corrections have been a consistent occurrence throughout stock trading history. In themselves, corrections are rarely cause for doom and gloom. There’s little evidence to suggest that these individual events portend a looming, more serious downturn. Even absent a long-term impact on stock prices, however, this type of volatility can be dangerous if it isn’t handled correctly.
Particularly for retirement investors, one bad decision induced by volatility can substantially impact the bottom line when it comes time to enjoy the golden years. Even more concerning, a relatively small proportion of Americans feel that they are well-equipped to withstand significant volatility if it follows them into retirement. Given that increased volatility is likely inevitable as 2018 progresses, plan sponsors should take certain steps to ensure that their clients’ accounts are safe.
Determine Asset Allocation
In times of volatility, asset allocation becomes paramount for people approaching retirement age. A 30 percent dip in the stock market, in time, becomes a mere blip on the radar for the 25-year-old; though it can be catastrophic for someone who is 65. Employees nearing retirement should be shifting toward a more conservative asset mix. Bond yields are on the rise, and other fixed income investments like stable value and annuities have been 401(k) and 403(b) favorites for decades. In 2018, there are plenty of good vehicles for reallocation away from a volatile stock market. Plan sponsors can assist employees by providing adequate communications on this topic and the choices that are available.
Emphasize Target Date Funds
An even more prudent option plan sponsors can offer are target date funds. These funds take some of the guesswork out of the age-to-risk relationship. As retirement investors age, funds automatically shift assets out of high-volatility securities into more stable options. Additionally, by using conservative projections on securities returns, plan advisors can make long-term retirement investing more prudent. By combining modest projections with target-date investment management, plan sponsors can offer retirement investors insulation against market fluctuations.
Stay on Course
Still, nearly all retirement investment accounts have at least some portion of their assets allocated to equities. It can be jarring for a 60-year-old couple to see their net worth tumble by 10 percent or more. With retirement on the horizon, more than one such couple has pressed the panic button in response to what amounts to normal market fluctuation. Selling low might sound like an obvious bad choice, but it can be a difficult temptation to resist when signs seem to be pointing to a worst-case scenario in which an employee ends up with a significantly reduced retirement nest egg. It’s vital for plan sponsors to urge their employees to stay the course (assuming their allocation is appropriate to their age and anticipated retirement). In all but the most extreme cases, selling in response to a correction is a potentially damaging and preventable decision.
Let PlanPILOT Help
PlanPILOT specializes in helping plan sponsors minimize the risk of bad outcomes for their employees. From employee education to investment oversight, we deliver comprehensive solutions for retirement plans in times of market volatility. Call us today at (312) 973-4911 or email info@planpilot.com to see how we can help you and your participants protect their retirement plans.