Tips for Managing Market Volatility
The recent volatility is understandably concerning, and current circumstances have created a turbulent climate. However, it's important to keep a long term focus when evaluating retirement assets.
Here are a few tips to help concerned employees weather the recent turbulence:
Consider your time horizon and risk tolerance.
Those who are near retirement still need market growth potential to help support possible decades spent in retirement, but also want to control the potential for losses. Younger investors have more time to wait out market recovery. Many employer-sponsored retirement plans use Qualified Default Investment Alternative (QDIA) strategies, which are designed for the lifecycle of saving for retirement based on an investor's time horizon; this offers an age appropriate, convenient solution. Outside of a QDIA, most plans also offer an array of investments that represent different investment opportunities and risk scenarios. Whether in a QDIA or constructing a portfolio from the plan lineup, it’s crucial to have an appropriate strategy.
Times like these reinforce the need to:
- Allocate appropriately for risk tolerance
- Diversify in a variety of investment types
- Rebalance periodically
The financial markets are always in motion – therefore, it’s probably safe to assume that volatility will occur again. Having an investment strategy that's cohesive with your time horizon and risk tolerance, as well as diversifying and rebalancing helps investors to prepare for volatility instead of having to take a more reactionary approach.
Be wary of reactionary measures.
Drastic reactions, such as account liquidation or moving into ultra-conservative investments, can have long term consequences for investors. Cash distributions result in significant tax and penalty considerations. Conversely, altering investments due to market activity could result in missing or not participating fully in a rebound. Over the long term, the market has trended resilient, and selling off locks in your losses prevents you from profiting from subsequent gains.
Rebalancing means that you're readjusting your current account balance to match your investment allocations for future contributions. Over time, current balances tend to shift based on market activity. By rebalancing, you’re ensuring your current balance is cohesive with your ongoing investment strategy. In addition, it can help investors sell high and buy low because it sells the overinflated portions of the portfolio, and reinvests where the portfolio has become low. Many provider websites have an easy, auto-balancing feature, and most QDIAs automatically rebalance.
Investing on a regular schedule via your payroll contributions allows you to take advantage of market volatility. It’s called dollar cost averaging and you benefit because you buy more shares when prices are low and fewer when prices are high.
What’s causing the volatility? While many factors contribute to the state of the market, there are a few key drivers in the recent turbulence:
Coronavirus (COVID-19): As confirmed coronavirus cases increase, cancellations, restrictions and other measures to help mitigate the spread are put in place; this results in loss of revenue and business disruption for companies, and fear for consumers.
Oil Market Dislocation: Oil prices have experienced a significant decline and Saudi Aramco has announced cuts to entice refiners in Asia, Europe, and the U.S. to use Saudi crude. In addition, Saudi Arabia has implied they could raise production to record levels, having drastic impacts on global supply and demand dynamics.
Feel free to share our video, Investing for the Long Term, with employees for additional education on this topic.
On a plan level, Assurance Financial Services (AFS) takes steps to evaluate the downside exposure of the investments in the plans we advise on. In addition, we review Qualified Default Investment Alternative (QDIA) strategies that provide plan participants with an easy solution that is generally age appropriate.
If you or your employees have specific concerns, please reach out to a member of the AFS team.
Using asset allocation as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.
FOR INFORMATIONAL PURPOSES ONLY. This is a general guide and not intended as advice. Information presented in this informational guide is subject to change. This is not a complete analysis of all subjects covered; individual factors may influence your specific circumstance.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Assurance Financial Services, Ltd and Assurance Agency, Ltd are not affiliated with Kestra IS or Kestra AS. Assurance Financial Services, Ltd is a wholly owned subsidiary of Assurance Agency, Ltd.
ABOUT THE AUTHOR