Peaks and valleys of the market probably give you fits about your investments in retirement savings accounts. Nobody can tell when Wall Street’s ups will peak and its lows bottom out, but you can protect yourself with patience and a cool head.
Our firm’s 401(k)/403(b) services for corporate clients include helping their employees make informed decisions about investing in their employer’s retirement accounts. I receive several calls asking about “safe” 401(k) investment options for plan participants.
Many callers feel uncomfortable about an apparent slide in account values and persistent warnings of a coming major market correction; they want to protect their money. My first recommendation -- to do nothing -- is usually not what they want to hear.
Asset allocation. Why do I recommend leaving holdings alone as a safe strategy? Simple: asset allocation, which according to research affects 90% or more of your investment performance volatility.
If your portfolio encompasses different asset classes according to your individual comfort level or risk tolerance and your retirement time line, normal ups and downs of markets constitute no reason to change your investments. Even larger shifts in assets’ value don’t necessarily endanger your returns.
Change in circumstances. Many of these might indicate that you need to shift your asset allocation, such as aging to within the last five years before your retirement.
The closer you are to retirement, the less time you have for your investments to return to previous, higher values after a down market. Your mix of assets might need updating.
Timing. Timing also becomes an issue when you change your investments based on short-term market conditions.
How long will any current downturn last? When will you feel safe to go back to your previous investment strategy? What happens if the markets respond to a correction with a run of new record highs and you remain in your supposedly safe position?
Buying or selling. Should you spend more time focused on the value of what you already own or on the price for what you are buying?
When corrections cut the value of your retirement account, consider keying in on the other side of the situation: The current price for new shares of your investments are likely lower now. Buy low.
If you set up an asset allocation that is appropriate for you, the value of what you already own may return to its previous level as the markets return to theirs. More importantly, the shares you purchase in down markets can begin adding value and returns much sooner.
Get help. Employers often offer one-on-one investment advice to every employee. Nearly every plan offers help with allocation choices, either via a customer service number or a Web-based planning tool.
You don’t have to figure out allocations on your own.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
Asset allocation does not ensure a profit or protect against a loss.
This article was written by Tim Long.
This article was prepared by AdviceIQ.
AdviceIQ has an agreement to republish this author's content.
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