Taking Stock of Declines in Stocks
If you read or watched the news in the first quarter, you may have come across one or more of these headlines. Doom and gloom consumed the stock market at the beginning of this year.
Disturbing financial news often creates an intense urge to “do something” with your own 401(k) account – an urge that can feel nearly irresistible. For many, a fear of losing even more of their hard-earned (and hard-saved) retirement funds takes over.
For some, that may mean hitting the “panic button” and selling their stock funds. Selling stock funds and moving to less volatile money market, stable value or bond funds may feel more comfortable or “safer,” but in fact it is one of the riskiest – and often one of the worst – moves you can make on your road to retirement.
How do you avoid making a rash decision in unsettling times? Talking to a financial professional can help, but a short history lesson may also be useful.
What does history tell us about the stock market? Simply this: We should expect the market to fall – and sometimes in dramatic fashion. By February 11 of this year the S&P 500 Index, a commonly used barometer of stock market performance, was down by over 10% since the start of the year. The drop in value may have felt unnatural, scary, and perhaps one-of-a-kind. Even the headlines blared: “Worst start to a year in history.”
What does history tell us about a market decline of 10%, though? Well, from 1928 to 2013 the stock market declined by at least 10% every 11 months, on average. In other words, it happens quite frequently.
Source: The Motley Fool, using data from S&P 500 and Dow Jones Industrial Average indices
It is important to understand at all times where you are in relation to your retirement goals. Are you on track? Should you save more? Do you need to rebalance your portfolio? It never makes sense to completely ignore the market.
However, if you have a properly diversified and allocated 401(k) portfolio our advice for investors in turbulent times is radically straightforward: Do nothing. It sounds simple; it sounds easy. But it is one of the most difficult tasks you will encounter as an investor.