Market Volatility

The recent declines in stock markets around the world have tested the confidence of even the most experienced investors. While short-term volatility is a genuine risk of stock investing, the boom market of the 1990’s led many to believe that extended down markets were a thing of the past. Few, if any, predicted the speed and the depth of the fall, and the fact is no one can be certain of what the future holds.

Before you react to these unsettling times by changing your retirement savings strategy, here are a few investment basics to keep in mind:

Maintaining contributions without interruption works for you.

While it may be tempting to temporarily suspend contributions to your savings plan, such a decision can hurt you. First, you will lose any tax advantages that such contributions bring. Secondly, you will miss the opportunity to "buy low." The process of making regular contributions results in what is commonly called "dollar cost averaging"*. By continuing your savings plan contributions during down markets, your costs will be relatively lower, thereby enhancing potential future investment gains.

Regularly rebalance your portfolio in line with investment objectives.

If you haven’t done so recently, it may be time to rebalance your portfolio. Remind yourself of your original asset allocation decisions. Assuming your personal situation, goals and time horizon are the same as they were then, rebalance your assets to adjust for recent market volatility. This will mean transferring more money into asset classes and investment styles that have had relatively weak performance, and transferring out of those that have had better performance.

Don't chase performance.

Making investment decisions based on past performance has proven to be an unsuccessful investment strategy. Buying funds after they have risen significantly often means "buying high." Alternatively, selling or transferring out of lower performing assets, means "locking in your losses," making it likely that you will miss much of the upswing that often follows a downturn. Most experts agree that the best way to weather volatile markets is to determine your long-term investment strategy and stay the course.

Saving for retirement is a long-term proposition.

In the end, it's long-term performance that matters. Historically, the higher short-term volatility of stocks has translated into higher long-term returns. This means that time can be your greatest asset. Even if you are close to retirement age, it's unlikely that you'll need to withdraw all of your savings immediately.

Ultimately, you need to be comfortable with your investment decisions. If the recent market fluctuations are too much for you to bear, you may have overestimated your tolerance for risk when originally deciding how to allocate your assets. Shifting to a more conservative allocation, however, may mean that you will need to contribute more to the plan in order to meet your retirement goals.

* Dollar cost averaging does not guarantee a profit and does not insure against losses in declining markets. You also should consider your ability to continue investing through periods of high and low price levels.