The more people look at their 401(k) balances, the lower their long-term returns are likely to be.(Photo: Matt Bowden/Unsplash)
With the S&P 500–or broad U.S. stock market–off over 20% as of June 30, most 401(k)s and investment accounts are down well below January highs. Investors will open their June statements to see year-to-date declines, even if their portfolio held only low-risk government bonds which have also swooned as interest rates ratcheted higher.
Experienced investors know, however, that short-term declines are nothing new. “Corrections” or pullbacks of around 10% occur every 18 months on average, and more substantial 20% declines happen every few years or so, even though the overall long-term trend of the markets has been persistently upward.
For that reason, if your 401(k) or investment account has taken a pounding, you may be better not taking a look, argues writer Anne Tergesen in The Wall Street Journal. The more people look at their 401(k) balances, she explains, the lower their long-term returns are likely to be.
Here’s why. Checking day-to-day price movements in your account can make you lose sight of long-term goals and anxious to tinker with your investment strategy, say experts. In fact, we have observed first-hand that when clients fret over their short-term performance, they are more tempted to make damaging account adjustments.
If market volatility is getting under your skin, here’s some advice to help you cope:
Keep in mind that market ups and downs are a normal part of the investment process. Periodic declines are the norm, not the exception. And, despite what they would have you believe, absolutely no one knows where the market is headed next. Forget what you hear on CNBC or read in that market newsletter. No one knows what’s just around the corner. But here’s what we do know. All bear markets do come to an end, and market rebounds can reward those who hold on to long-term investments, or better yet, invest when market prices are down.
It may be time to turn off the news. Information overload today makes market movements virtually impossible to ignore. “The more often you update yourself on the market’s fluctuations, the more volatile and risky it will appear to you — even though short, sharp declines of 5% to 25% are common,” writes financial commentator Jason Zweig. (Here’s the kicker: He made that comment in 2015 when markets dipped due to China woes. Oh, and by the way, the market has more than doubled since then). Of course, the danger in paying too much attention to market noise is that it may lead you to make harmful portfolio changes that you may later regret. We saw several investors who sold out in 2008 permanently lock in reduced portfolio values; those who stayed put rebounded and ended up ahead.
Remind yourself that this is why we diversify. Your portfolio is made up of stocks, bonds and other investments to help reduce risk and even out returns. It is true that stocks and bonds have been moving largely in sync so far this year, and diversification has not worked as well as it normally does. Nonetheless, if you need funds, we can tap cash and bond holdings less affected by the market, and in most cases, your portfolio’s market value will have minimal impact on your day-to-day lifestyle or your regularly scheduled income withdrawals. The typical monthly withdrawal is only 0.3% of your total account balance and unlikely to make a permanent dent.
Stay focused. Your portfolio is custom designed for you to help meet your long-term goals. You need growth and income to make sure your portfolio does not run out of steam before you do. We know that short-term declines are uncomfortable and even scary, but dialing back the risk too early can lead to too-low returns and disappointing growth, especially in times like this when inflation runs high. That’s why it’s important to ignore day-to-day fluctuations and focus on the long-term.
The biggest threat to your long-term investment success is … you. It’s not easy to keep a hard head when markets decline, but emotions can lead you to make damaging decisions. “Financial markets have the ability to help you achieve your financial goals. But anxiety, fear, and overblown media coverage can cause investors to let emotions override logic, leading to knee-jerk investment decisions that can jeopardize success,” write market experts at Schwab Investment Management.
We’re here to do the worrying for you. We are carefully watching market developments, and are attentive to opportunities to help add value for you. As investment professionals, we are not in favor of actions that may give you short-term relief, at the price of undermining your long-term financial security. At the same time, we understand the anxiety that some clients may be experiencing, and urge you to contact us to discuss your investment strategy.
In closing, we would like to share one chart with you, compliments of the market research team at J.P.Morgan Asset Management. The chart, below, shows the lowest point (in red) recorded by the S&P 500 each year since 1980. The grey bar shows the final returns achieved by the index each year as of December 31. This does an excellent job showing that market declines at some point during the year do not necessarily point to market losses at year-end. As case in point, look at “Black Monday” in October 1987, when markets dropped over 22% in one day, and 34% overall, before rebounding to close in positive territory for the year.
The chart also shows that despite average intra-year drops of 14%, annual returns were positive in 32 of 42 years. The moral of the story: Don’t despair when year-to-date market returns are disappointing. What matters is long-term results, and the best way to succeed is to ignore the inevitable bumps along the way, stay focused on your end-goals, and stay faithful to your portfolio strategy.
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