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It has been a pretty tough September for investors. At certain times during the month, the S&P 500 had dropped almost 6%. Investors are back to experiencing days in the market that are either up or down hundreds of points on the Dow. With the pandemic creeping along and the upcoming presidential election, investors are frustrated, tired and uncertain.
Further, as more Americans review their retirement strategy in light of an unprecedented year, they are getting worried. Allianz Life found in its Quarterly Market Perceptions Study, Q3 2020 that 53% of those surveyed say the pandemic is having a negative impact on their financial plans for retirement.
But even if the markets continue to be volatile, that might not be a bad thing for retirement planning. In fact, investors should not worry. Opportunity comes when we least expect it in the markets. The key is to tune out the noise, stick to your knitting and find a way to increase your retirement savings.
Tune Out the Noise
One of the biggest challenges for investors is that they are inundated with news regarding the markets. It is on their phones and blaring from their TVs nonstop. Well-known pundits often give the illusion that they know where the markets are headed with the hope of saying something worthy of a headline. With the markets fluctuating wildly, the media noise drives investors to feel compelled to do something.
But it is in these wild markets where action might actually damage investors’ portfolios. Trying to outguess the markets usually does not work. For instance, many investors are pondering if they should go to cash until after the election. But taking this course of action requires two things. Investors need to be right on the timing to exit the market AND they need to also be right on the timing to get back in.
Studies of this decision tend to show that investors get only one of these decisions right. They are good at knowing when to exit, but they fail at reentry. The JP Morgan 2020 Guide to Retirement illustrated that by missing just the 10 best days in the market from January 3, 2000 to December 31, 2019, an investor’s return on the S&P 500 was 2.44% versus 6.06% if staying fully invested. Further, the study found that 6 of the best 10 days were within 2 weeks of the 10 worst days.
As a result, investors are better served if, once invested in the capital markets, they remain committed during volatility. Simply tune out the commentary from the media, especially since most of what is on TV is not applicable to investors’ personal situations.
Sticking to Your Knitting
As frustrating as these market fluctuations have been, the best advice for investors is often the dullest, because over the long term, these short-term blips do not actually negatively affect a portfolio.
That is where sticking to your knitting is important. Prudent investors follow a set asset allocation for their portfolio. Asset allocation is a strategy to build a portfolio with a specific group of assets to weather different markets. The relationship between stocks and bonds is key to having a smoother ride through turbulent markets.
What investors should focus on is not the daily market moves, but whether their asset allocations are close to the pre-set targets. For example, if the portfolio is structured to have a 40% allocation to fixed income and it has fluctuated either under or over the target, the investor can manage the portfolio back to target.
Increasing Contributions
Further, for many in the pandemic, actual living expenses have dropped due to less travel and going out. This creates an opportunity to increase contributions to retirement accounts in the final quarter of the year.
For 2020, 401k participants can contribute up to $19,500 to their plan. For those over 50, an additional $6,500 catch up contribution is allowed. If an investor is not maxing out this contribution, this is the time to do so. Since it’s a pretax deduction, the actual cost will be less than the increased amount being put into the plan.
Investors should remember that increasing their contributions will not be a case of money going down the drain. Rather, it increases the chances of reaching their retirement goals.
Stay the Course
The recent market volatility should not deter investors from their long-term retirement goals. Rather, they need to keep steady heads to make sure that they do not overreact to news that will only have a near term impact.