By David N. Chazin
With the dust from the lab’s transition still settling, it’s important to make sure your savings and investments (outside of your pension) are properly positioned for retirement. When markets going through a period of decline and extreme volatility, focusing on a long-term investment plan may be difficult to do.
As anyone who paid attention during the crash of the early 2000’s knows, market downturns are not a one-time phenomenon. In fact, since 1926 there have been 14 stock market declines of 10% or greater*. Each has varied in magnitude and duration, and with the exception of the current market, each has recovered (including the horrible downturn of the early 2000’s). Here are a few things to remember when the market outlook looks bleak:
1. Markets go through cycles.
U.S. investors have enjoyed a stock market that continues to rise over time despite periodic drops in value.
Effective investing during market cycles requires decisions that may be uncomfortable. When markets are most optimistic and exuberant, we should be cautious and ask “why?” When they are most pessimistic, like recently, we should see opportunity for the long-term investor. Sir John Templeton, one of the founders of modern international investing, believes that the real buying opportunities are at the time of maximum pessimism – “when the blood is in the streets.”
Investing in the stock market is a risky venture, but most long-term investors have found a need to use stocks in their investment plan, whether planning for retirement, buying a new home or looking to pay for a child’s education. Despite market volatility, economic crises, wars and world tragedies, the stock market – based on the performance of the S&P 500, an indicator of the overall market) has provided the best long-term return compared to other options like bonds or cash accounts (source: Ibbotson Associates, 2006).
2. If you continue investing on an ongoing basis, you’re dollar cost averaging.
Dollar cost averaging** is a simple investment strategy that helps you maintain a disciplined course through fluctuating markets. If you’re investing through the lab’s 401(k) plan, you’re already taking advantage of this strategy – and you may not even know it.
Through payroll deductions, you contribute a fixed monthly amount to your 401(k), buying shares at the current price. As the share prices drop, you’ll be able to buy more shares with each contribution, and when prices rise, less shares. By investing a fixed amount on a regular basis, you end up owning more shares and reduce volatility.
For example, let’s say you contribute $1,000 to your 401(k) each month. If the share price is $100, you can buy 10 shares. Let’s say next month, the share price is only $80, so you can buy 12.5 shares, and one month after that, the share price goes back to $100, you can buy only 10 shares. After three months of investing, you would have invested $3,000 total and own 32.5 shares (10 + 12.5 + 10), compared with only 30 shares if you had invested all $3,000 on day one.
Of course dollar cost averaging does not guarantee a profit or protect against market loss.
3. Nobody can time the market.
Even for professional money managers, trying to “time the market” with a “buy low, sell high” strategy is a risky path. Moving into and out of markets based on any anticipated changes in price as opposed to fundamental changes in value is speculation – not investing. Peter Lynch, a famous fund manager believes, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”
After all, long-term investing is not about timing the market; it’s about time in the market. Contributing as much as possible, as early as possible, means even small monthly sums can have a longer opportunity to grow and weather market volatility over the years.
4. Asset allocation is a diversification strategy designed to help manage risk.
While asset allocation cannot offer a guarantee against market losses, it offers you an investment risk management tool. Sector concentration, the process of investing in a single industry – no matter how attractive the sector may appear, no matter how compelling the arguments – is still speculation.
A well-balanced portfolio should be diversified among the major asset classes (cash, fixed income, large and small companies, domestic and international). The only guarantee is that some of these areas will periodically disappoint you, but you never know which ones or when. If you are invested across several asset classes you may still lose money, but you’re much better protected against the type of losses that could be devastating to your post-lab retirement.
Of course asset allocation does not guarantee a profit or protect against market loss.
5. You can seek additional investment choices.
Although there are some good funds available for your UC accounts, the simple fact is that no one company has all the best investment vehicles for you. Whether your accounts are losing or gaining, you may want to consider other investment vehicles that are only available to you if you move your accounts into an IRA outside of UC. An independent financial planner can help you choose the right strategy for your situation, and determine whether you might benefit from considering thousands of investment options, not just the handful offered to you within the UC plan.
6. If you’re hoping to retire soon, you may need to protect yourself against potentially devastating losses.
Once you need to withdraw assets, the sequence of your returns can devastate your retirement plan. Imagine retiring in 2000, right before the technology stock bubble burst. If you didn’t invest wisely, you lost a significant portion of your retirement assets, and had to withdraw money ON TOP of your losses, leaving even less money to grow for future years. Losing your principal may be the greatest risk of all, and you may want to speak with a financial professional who can help you find solutions to protect against this.
7. A disciplined investment approach is still the best strategy for handling volatile markets.
With all of the ups and downs, some investors have abandoned the markets, but they may be missing opportunities when the market recovers. At all times, we should stay focused on a long-term investment plan or “investment policy statement” to guide our decisions and help us through the tough times.
Because I work with many lab employees and retirees, I’m very knowledgeable about the UCRP, UC’s retirement accounts, the options available with TCP2, plus other issues specific to lab employees (in addition to the investment, retirement and estate planning issues everybody faces). In fact, chances are you may know one of my lab clients and you can ask them how working with an advisor has helped them.
If investing your money wisely seems like a daunting task, please contact us at (800) 318-7848, and we can arrange a complimentary exploratory meeting in either our San Ramon or Livermore office (about a mile from the lab), to explore devising a personalized strategy to meet your goals and suggest the most appropriate investments for your portfolio.
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*A downturn represents at least a 10% decline in the index level of the S&P 500 from a newly established peak, and ends when the index value establishes a new low before coming back up to that peak.
**Asset allocation, dollar cost averaging and diversification do not guarantee a profit, nor protect against a loss.
Using the dollar cost averaging strategy involves continuous investment in securities regardless of fluctuating pricing levels of securities. Therefore, you should consider your ability to continue purchasing through periods of low price levels.