The Dow Jones Industrial Average DJIA, -2.13% S&P 500 index SPX, -2.06% and Nasdaq Composite Index COMP, -1.25% have all been experiencing volatility in recent months, weighed by rising bond yields and a trade war with China. The Dow fell nearly 1,400 points in two days. What should you do? Some advisers say do nothing. But many retail investors have questions about what this means for their investments.
On social media, people with retirement accounts are wondering if, having been reminded that the market does not always move upward, they should move their money into a more conservative posture. Other want-to-be investors are trying to time the market and jump in at the market’s lowest point and thus score optimal returns when equities do bounce back. Advisers, meanwhile, are telling their clients — and everyone else — to remain calm, and not react rashly.
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Here are some of the questions people are asking:
Does volatility affect all retirement accounts?
It depends on what’s in the portfolio, but generally, yes. Individual retirement accounts and 401(k) plans are investment-based, and many are target date funds, which are funds focused on one particular year. For example, if it is a target date fund for 2050, the investments will be more aggressive now and become gradually more conservative as the years get closer to 2050. Investment managers are beginning to diversify these funds in the wake of the market’s recent volatility, looking for assets with different risk exposures to eventually see better long-term returns.
I was going to open a retirement account — should I wait?
No. Market volatility could seem scary, but it can benefit you in the future. “The market volatility can be viewed as a buying opportunity when you are in it for the long haul,” said Michael McKevitt, director of financial planning at Guillaume and Freckman in the Chicago suburb Palatine, Ill. “Don’t let it prevent you from making long-term investments.”
Why? Because you’re buying at a lower price, said Mark Germain, founder and chief executive officer of Beacon Wealth Management in Hackensack, N.J. The objective of a retirement account is to have money in the future, and that money will be there (and then some) when it’s time to withdraw. “It has been proven over and over again that people cannot effectively time the market so if you take your money out, when is the time to go back in?” he said. “It can pop up 5% in a day just as it can go down 5% in a day.”
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Should I move my traditional IRA to a money market account?
Probably not, says Chris Chen, chief executive officer and certified financial planner at Insight Financial Strategists in Waltham, Mass., near Boston. A traditional IRA assumes the account is intended for retirement, whereas a money market account is a conservative account with an interest rate higher than the average savings account with fewer potential returns you’d see in a traditional investment account.
“You have plenty of time to see dips in the market and recoveries” over the span between now and retirement, he said. “When we act with insecurities, we end up selling low and buying high, and that reduces overall returns,” Chen said.
When should I pull out my investments?
The answer depends on when you are you planning to use the money. For long-term goals, such as retirement, the answer is later. For short-term goals, the answer is probably still later. But there are things you can do to mitigate losses, said Rose Price, partner and financial adviser at VLP Financial Advisors in Vienna, Va. First, figure out your risk tolerance.
If you’re afraid of a big correction and losing your money, you’re risk averse, whereas if you can stomach the ups and downs, you’re risk-seeking. Then, determine when you actually need the money. If it’s in a few years, consider allocating your assets more conservatively with bonds, or putting money into CDs (certificates of deposit). “What’s your comfort level?” she said.
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How much longer should I wait to buy?
You shouldn’t try to time the market, but if you were waiting for a correction to buy so the investments were “on sale,” now would be the time to do so, Germain said. If you want to hold out for a larger drop, that’s fine, he added, but divide the money into two buckets — one that you intend to invest in now, and one that you save for a larger drop. That way, if the market does turn around and climbs, you wouldn’t have lost the opportunity altogether.
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