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The stock market’s wild ride this week may have you questioning your retirement investing strategy.
On Monday, the Dow Jones Industrial Average shed more than1,100 points before rebounding to close slightly higher. However, Tuesday’s early market activity ushered in a new triple-digit drop before the index began to bounce back midday.
For 401(k) plan and other retirement investors, the first instinct may be to move to safer assets.
Alight Solutions, which tracks 401(k) trading activity, has seen net trades from equity to fixed income in light of the recent rout, a company spokeswoman said.
But experts generally caution against making sudden moves that may contradict your long-term retirement goals.
“It’s especially important to not panic,” said Rita Assaf, vice president of retirement leadership at Fidelity Investments. “Stick to your long-term plan.”
Historically, a stark market downturn tends to precede a period of positive performance, Assaf said. If you sell your stocks while they’re down, you will miss out on that upside.
Many investors learned that lesson the hard way during the 2007-2008 Financial Crisis, said Sri Reddy, senior vice president of retirement income and solutions at Principal Financial Group.
When the S&P 500 index dropped by 40% to 50%, many investors clamored to move all of their assets to money market accounts. By the time they decided they were comfortable to put their money back in stocks, they had already gone up.
“There’s no time that can make up for that kind of loss,” Reddy said.
The lesson: It’s important to identify a level of volatility you’re comfortable with and stay the course during choppy market activity.
“The reward doesn’t come without the risk,” Reddy said.
Still, it would be wise to take this week’s rocky market ride as inspiration to shore up your retirement investing strategy.
Revisit your allocations
Because bond returns are often inversely correlated to equities, investors tend to turn to them in times of trouble.
But if you’re getting bond returns of 1% to 1.5%, or even slightly higher, you’re accepting a negative net real return, Reddy said.
Still, it is important to have a healthy mix of equities and bonds.
Ideally, your diversified investment strategy will expose you to different areas of the market to help manage your overall portfolio risk, Assaf said. That includes U.S. small cap, large cap and international stocks, as well as investment grade bonds.
Because stocks have generally climbed for a prolonged period of time, it’s also important to check to make sure that your portfolio has not drifted to a …….