Question: I have a lot of my retirement money riding in my 401(k) account through my employer. With the recent market drops, I’m having a little trouble sleeping at night. Should I be cashing out? Or should I be moving more money into stocks as the prices drop?
Answer: The stock market has certainly become more volatile. However, let me remind you that market volatility is not unusual and should be expected. The best way to deal with it is to ignore it and stick to your investment plan. Investors who respond ad hoc to market movements do poorly compared to investors who stick to their long-term investment policy.
It is especially important during times like this to remember what we do know and what we don’t know:
What We Know
We know that the U.S. economy is fundamentally strong, continuing to grow slowly and create jobs.
We know that China has devalued its currency and that share prices of Chinese stocks have been dropping precipitously. But that’s not a big problem for us because we know that U.S. exports to China make up less than 1.0% of U.S. Gross Domestic Product.
We know that Brazil is entering a recession.
We know that oil prices have continued to decline along with other commodities.
We know that investors worldwide are buying US Treasury Bonds for safety, even though the consensus is that the Federal Reserve will soon begin to ratchet up interest rates.
We know that share prices of developed market stocks, including those of the U.S. and Europe, have been very volatile. We know it's been almost seven years since the last bear market, and we know that the US stock market consistently has intra-year periods of decline each and every year. Market declines have averaged 14.2% per year, and the market has had negative returns in 8 out of the last 35 years (see chart below). That means that, on average, the market is down 1 out of every 4-5 years.
In summary, we know what is happening today and what has happened in the past.
What We Don’t Know
Nobody, no matter what they say or how smart they are, knows what stock prices, interest rates, bond prices, or the economy will do tomorrow. Only because they know what happened in the past can they extrapolate and assume that the past will repeat itself. Even the market "experts" are often wrong.
What you need to do is stick to your investment plan. That means continue to contribute to your retirement account each payday and enjoy the benefits of dollar-cost averaging. You are buying more shares when prices have dropped.
Also, if needed, rebalance your portfolio if it gets out of whack, which may happen during rapid market drops. For example, if the stock funds in your portfolio are way down, then you will need to sell some of the bond funds to buy some more stock funds to bring your portfolio back into balance. If you stick to this discipline, you will always be buying low and selling high and, over the long-term, you will do well.
One of the hardest parts of successful investing is to control your fear and to recognize that volatile times like now are normal and you should expect them and stay calm.
Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to firstname.lastname@example.org.