Has watching the morning news or reading the daily business journals become a source of anxiety to you? The financial headlines haven’t been very uplifting lately. Automakers Cut Back on Jobs; The Dow - and Dollar - Down Again; Gas prices reach record highs. It’s no wonder so many of us are tucking our 401(k) statements - unopened – into our bottom desk drawers.
Unless you live in a media-free world, it is unlikely that the recent market volatility has escaped your attention. And if you’re among the millions of Americans who are saving – or making every effort to save - for retirement, the steady decline in your account balances is very likely causing you a great deal of concern: not only about your ability to retire comfortably, but maybe even your ability to retire at all.
So what should you do about those falling account balances? For many investors, the answer may come as a bit of a surprise: nothing. Of course, individuals who are within a few years of retirement may want to move their funds into investments offering a lower degree of risk and a higher degree of protection. But for the millions of working Americans with 10 or more years to go before retirement, the answer may simply be to stay the course.
Let’s consider a few reasons why.
1. The current economic climate is the result of “normal” market forces.
By “normal” I mean market forces which are neither new nor unique to the economy. As a country, we have weathered them all before: tightened credit, low interest rates, rising commodity prices, high consumer debt and low consumer savings. And just as before, they should eventually work themselves out. Past performance is no guarantee of future results.
As the dollar falls, American goods (including tourism) become more affordable to foreign markets. Eventually, that affordability has a positive impact on American manufacturing, which in turn leads to the creation of new jobs. As well, when consumers feel the pinch from rising commodities prices, the demand for those commodities - gasoline for example – begins to decline. The resulting rise in supply eventually brings the price back down. We’re already seeing that principle at work in the housing market. Thus, making drastic changes to an otherwise solid investment or retirement planning strategy in response to normal market ups and downs will generally defeat the purpose for which that strategy was devised and implemented.
2. The fund managers who oversee your investments.
Be they mutual funds or variable life or annuity sub-accounts, they not only understand the market forces that are currently at work, but also the long-term nature of your retirement and investment strategies. Provided you have put your money with respected financial providers, they are very likely well-qualified to manage your investments through the market ups and downs that will occur during this – and future – “normal” market cycles.
3. Many of today’s investments have built-in features that allow you to accommodate periodic market swings.
Two major benefits of variable life insurance and variable annuities, for example, are the ability to allocate assets to sub-accounts that reflect both your tolerance for risk and the timeframe over which you plan to invest; and your ability to move assets between sub-accounts quickly, easily, and free of charge should your personal circumstances or risk tolerance change. You may also be able to adjust any ongoing premium payments you are making.
Another feature which can help put your mind at ease during choppy economic times is dollar cost averaging. Dollar cost averaging is an investing strategy built in to certain investment products that can help lower your exposure to risk. The concept is simple: you invest a fixed dollar amount at regular intervals (e.g., monthly) into the same investment regardless of how many “shares” of that investment it is buying. In this way, you purchase more shares when the markets are down and fewer shares when the markets are up. The result: over time, help you reduce your risk of loss should prices fluctuate dramatically. (Of course, the opposite is also true. Your return will be lower should prices rise dramatically). In volatile economic times, however, most investors are more interested in mitigating and protecting against loss than in going for large gains.
Dollar-cost averaging may lower your average per-share cost; however, it cannot guarantee a profit or protect against a loss in a declining market. Dollar-cost averaging involves continuous investing, regardless of fluctuating price levels, and, as a result, you should consider your ability to continue to invest during periods of fluctuating price levels.
If current economic conditions have you concerned about your protection, asset accumulation, and retirement plans, it doesn’t necessarily mean you should change how, how much, or how often you are saving for retirement. Just remember three things: Market fluctuations – even the kind we’ve been experiencing lately - are normal; secondly, if you’ve chosen a quality company, the people managing your investments are likely well-qualified to navigate on your behalf what will often be choppy seas; and thirdly, if you’re invested in today’s variable life and annuity products, and still have a few years before retirement, talk to your financial advisor. He or she will be happy to help you take advantage of the built-in options that can help make weathering the current economic climate a little less stressful.
Investors should consider the investment objectives, risks, charges, and expenses of a mutual fund or a variable insurance product carefully before investing. Please carefully read the prospectuses for the relevant mutual fund or variable insurance product as well as its underlying investment options, which contain this and other information about the product. You can obtain a prospectus from your financial professional.
Winfield C. Greenwood, RFC® is the owner/founder of Redstone Financial Group, LLC, an independent financial services firm based in Las Vegas. He shares his expertise on business and personal financial planning with the RJ every week. Contact him at (702) 475-6363,firstname.lastname@example.org, or connect via Facebook or Twitter.