Market swings can prompt participant concerns
August saw some violent swings in the stock market, as investors grew increasingly nervous about a US-China trade war and the prospects of a global recession. Major Indices showed sharp drops and the volatility index soared. At one point on August 14th, a briefly inverted Treasury bond yield curve – sometimes a recessionary signal – spooked equity investors. Although markets calmed and bounced back in September, some market commentators and 401(k) investors are still concerned about the prospects for the rest of this year and next.
Retirement plan participants may be tempted to react to significant fluctuations in the market by making impulse decisions regarding their retirement accounts. However, investment performance can be most impacted by the way assets in the account are divided among stocks, bonds, and cash.
In the long run, most retirement plan investors could increase their chances to get better returns by keeping their money invested in a broad mix of investment types rather than by switching their investments every time the stock market moves up and down.
What you should know
- Plan sponsors can provide employee education focused on how retirement plan participants should react (or not react) to market volatility.
- Employee education should take into account the age and proximity to retirement of plan participants as these factors may affect how investors decide to respond to, or plan for, fluctuations in the market. Generally, those employees further away from retirement may want to stand firm in their long-term investments, while those employees nearing retirement may want to review their allocations between equity and fixed income vs. when they anticipate beginning to access their investments for retirement income.
- General tips for participants might include diversifying investments among asset classes, reviewing investment allocations at least once a year to determine if rebalancing is needed, and continuing to invest in retirement even during market downturns.
- Dollar cost averaging at fixed intervals over the long-term is another strategy that could be covered in employee education. This may result in lower average price per share over time.