There are several certainties in life—death, taxes, and, yes, market volatility. Fluctuations in your 401(k) or retirement savings account can stir up feelings of stress, panic, and anxiety, particularly when your hard-earned retirement dollars are at stake. But overreaction to these fluctuations is one of the biggest risks that retirement investors face. So in turbulent financial times, resist the urge to hit the panic button and instead stay focused on your long-term savings goals.
Here are some tips to help you remain calm in the midst of market volatility.
Be in it for the long haul. Saving and investing for retirement should be approached with a long-term mentality. In fact, for most of us, it is essential to helping achieve financial goals. So maintain the long view and construct a well-diversified portfolio to take advantage of investment opportunities and hedge against market risk.
Stay true to your plan. Even when your account balance declines in value, it pays to stick to your savings plan. Allowing emotion to drive your investment decisions could mean missing out on gains when the market stabilizes and swings upward, which, inevitably, it will.
Don’t try to time the market. Spoiler alert: trying to time the market doesn’t work! When you stray from your well-thought-out plan in an effort to boost savings, your investment performance is likely to get worse, not better. In fact, research has shown that chasing returns can cost the average investor around 2 percent annually—a significant figure, especially when compounded over time. Instead, as previously mentioned, diversify your portfolio using a wide range of investments or a target-date fund and trust your
Keep contributing to your workplace retirement plan. The actions we take in the immediate aftermath of turmoil often turn out to be ill advised. The same can be true when saving for retirement. Although your first instinct when faced with negative returns may be to pull the plug on your 401(k) contributions, don’t! Take a deep breath and think about the consequences. You may be leaving employer-matching dollars on the table or losing your ability to benefit from the magic of compound interest.
Get coached up. Just as a nutritionist can guide you in achieving your health goals, a financial advisor can coach you in investing in order to reach your retirement goals. Being able to lean on someone who has the experience and know-how to apply the tips described above can be invaluable as you march steadily toward retirement. Engaging an advisor can also help you feel more confident about your long-term, big-picture investing strategy.
If you have questions about how to stay focused during turbulent times, please reach out to me. I would love to help you!
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Commonwealth Financial Network® does not provide legal or tax advice. Please contact your legal or tax advisor for advice on your specific situation. Authored by the Retirement Consulting Services team at Commonwealth Financial Network.