The recent stock market sell-off reminds us once again what a wild ride investing can be. Like death and taxes, precipitous market drops also seem to be one of those unavoidable, inevitable realities of life. But what we have observed, at least historically, is that markets have a way of clawing their way back.
No matter how much we may try to remind ourselves of this in the moment, watching markets plunge can be painful, even for the most seasoned investors. But if your savings are in a retirement account—with years of work still ahead, nearing retirement or even already retired—it’s important to keep the following four things in mind:
1. You are investing for the long-term
Don’t forget, retirement assets have a major advantage in the face of short term volatility—they are invested for decades. Seeing the value of your retirement assets fall may prompt you to take action, but selling may only lock in your losses—and attempting to time your way back into the market is never easy (all too often this can result in selling low and buying high). In fact, good and bad days tend to cluster together: out of the 25 worst days in the market from 1998-2017, 23 occurred within one month of one of the best 25 days.
2. At times like these, diversification can be your best friend
As Harry Markowitz once said, diversification “is the only free lunch in finance.” At no time does this hold truer than in periods of market stress. Having assets that “zig” when others “zag” can help increase portfolio stability and may help you lose less in a sharp downturn. Now is a good time to take a look at your portfolio—if your investments all go in the same direction at the same rate, it may be time to look at some diversifying investment options.
3. Cash has its place–in a savings account
If your retirement savings are invested only in conservative options (like cash or short-term bonds), your savings won’t have the opportunity to grow over longer time periods—and you run the risk that inflation will actually reduce the value of your portfolio. As an alternative, if you think you’ll need to access your money in the next year or two, consider building up a cash cushion separate from your long-term investments—such as in a high yield, FDIC-insured savings account.
4. Target date funds can help you better manage your market risk
Target date funds adjust the amount of risk your assets are exposed to over time—offering more risk (and growth opportunity) when you are younger with a longer investment horizon, and less when you are older and approaching—or are already in—retirement. By adjusting the trade-offs between higher return potential and downside risk management, target date funds can help better position you for a smoother ride throughout your career and in retirement.
Large market drops can rattle any investor, so it’s important to remember your long-term goals and stick with them—in up markets and in down. That’s why for many people, investing your retirement assets in a diversified, all-weather vehicle you can live with for the long haul can be the best strategy of all.