Coming to terms with stock market volatility
There’s no getting around it. The
stock market is volatile. Every day the stock market goes up and down in
reaction to any number of issues involving business, the economy, or
geopolitical events. Most of the time investors take the market’s ups
and downs in stride. It’s only when the market declines substantially
that investors can become unnerved and make decisions that can be
harmful to their long-term retirement portfolios.
When will you need your money?
The answer to this question can help you determine the investment choices you select for your retirement plan portfolio. You’ll often hear this referred to as your “time horizon.” If you are 35 and plan to retire and begin withdrawing money from your plan at 65, your time horizon is 30 years. Your investment choices may be very different from someone who is 60 and has a five-year time horizon.
Time is your ally when it comes to investing. The rule of thumb is the longer you have to retirement, the more aggressive you can afford to be and the less you have to be concerned about short-term market downturns. A decline in the stock market that lasts for a relatively short time is unlikely to have a significant impact on your retirement plan account over the long term. If you have a relatively long time frame, you might consider investing most of your retirement dollars in stocks.
Stocks are the engine of growth in a portfolio
Stocks have been the investment of choice for retirement plan participants with long-term time horizons. Why? Because stocks, more than any other investment, have the greatest potential for growth over time. There’s no doubt that stocks are the most volatile investments, and history has shown that they have risen and fallen to a higher degree than bonds or cash equivalents. Still, over the past eight decades, stocks have produced greater returns than bonds or cash equivalents.
While past performance is no
indication of future results, the chart below shows the powerful returns
on stocks over more than a half century. While there were several
substantial short-term stock market declines during this time period,
Diversification and asset allocation—defenses against market volatility
investors, the words “diversification” and “asset allocation” are often
used interchangeably, but there is a difference. If you put all of your
retirement dollars in different types of stock—for example, investment
choices that favor large- company, mid-sized company, and small-company
stocks—you’ve diversified your assets among stocks, but you haven’t
allocated them. If stocks go into a decline, it is likely that your
whole portfolio, made up entirely of stocks, will lose value.
Source: Transamerica Retirement Services: Brochure: Market Volatility
Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.
This page was last reviewed and/or updated on Friday, July 03, 2015 05:22 PM