Q&A: Retirement investing advice in volatile market
The recent volatility of the stock market has many investors worried about their retirement savings and wondering what to do.
USA TODAY asked three top experts about this issue: Marc Doss, regional chief investment officer for Wells Fargo Private Bank; Catherine Golladay, vice president of 401(k) participant services at Charles Schwab, and Steve Utkus, head of Vanguard's Center for Retirement Research.
Q: What are you telling people who are worried they're losing money in their 401(k)s and other retirement savings?
Doss: Take a deep breath because there are some challenging issues ahead, such as Ebola and the slowing global growth. But most people's time horizons on investments are quite long. You can't make decisions based on short-term market movements or it will derail your long-term plan.
Golladay: You should develop a strategy based on your personal situation and risk tolerance, then stick with it. Focusing on your long-term goals can help you keep a clear head during volatile markets. Use this time to make sure you are taking advantage of important plan features like professional investment advice. A recent Schwab survey found that 70% of participants said they'd feel more confident in their ability to make the right investment decisions if they enlisted the help of a financial professional.
Utkus: Actually, most people in retirement and regular investment accounts see none of the intra-day volatility in the market. So most people aren't really worried they are losing money. In the case of 401(k) plans, regular contributions have more than offset a flat market for the year, so, in fact, 401(k) participants are sitting on more wealth. When they log on and look at their balance, they wonder what all of the noise in the headlines is about. Our general message remains the same: Ignore the short-term fluctuations in the headlines, and base investment decisions on your long-term objectives, time horizon, risk tolerance and your overall financial situation.
Q: Are your clients interested in buying or selling?
Doss: Clients left to their own devices are considering selling, but our job is to keep them focused on their longer-term goals, and we are telling them that this is not a selling opportunity but rather a buying opportunity. We recommend buying over a period of a few days rather than buying all at once.
Utkus: On any given day, including volatile and ordinary days, there are small fractions of clients both buying and selling stocks. If it is a down market day, more often than not, reflecting the overall trend in the market, there are fractionally higher numbers of clients selling than those buying. And the opposite is true on "up" market days. By and large, most people make no changes to their investments in response to short-term market moves. And those moving change a small percent of their portfolio, for example, less than 10%.
Q: How should people invest their money if they can't stomach the market volatility?
Doss: There are other options such as bonds, CDs or bank accounts, but that safety means you'll be hard-pressed to grow your money in this environment because rates are so low.
Golladay: First of all, it's important to set up a diversified portfolio that is aligned with your goals and risk tolerance. You want to keep your money working for you. Don't be tempted to reduce or cease 401(k) contributions just because the market is going down. Missing out on the effects of compounding could greatly hurt your retirement savings over the long term. Make sure you are contributing at least enough to take full advantage of your employer's match. The match is an automatic return on your investment that you can't get anywhere else.
Q: What if you're retired? How much should you have in the stock market? How much in cash?
Doss: How much retirees have in the stock market depends on their individual circumstances, but most people should have some exposure to stocks because they still need to maintain their purchasing power over the next 20 to 30 years. They should have enough cash so they can sleep at night and still keep their long-term investment plan in place. Other investments might include some conservative fixed-income investments such as corporate bonds, municipal bonds, CDs or bank deposits.
Utkus: Our general recommendation is that retirees should begin with a portfolio divided evenly between equity or stock investments (generally broadly diversified stock funds or ETFs, both domestically and internationally) and bond investments (including broadly diversified U.S. and foreign bonds). Over time, as they enter their 70s, retirees will want to reduce risk exposure to around 35%. Adding inflation-adjusted bonds to your portfolio as you get older also makes sense. These are general guidelines, and individuals will want to tailor them to their specific needs.
Q: How much of their retirement savings should people have in the market if they're in their 20s, 30s, 40s and 50s?
Golladay: Generally speaking, the younger you are, the more risk you can take on. But be careful. Every investment plan, including a 401(k), requires periodic maintenance regardless of your age. Make sure your portfolio is properly diversified. That's always your first line of defense. Now is also a good time to make sure you are allocated properly. Given the recent swings in the market, you want to make sure your specific investments aren't either over-weighted or under-weighted based on your long-term goals.
Utkus: Our general rule is that younger investors should have 90% of their retirement assets in equities. Gradually as investors enter their 40s they should begin to taper down allocations to where they are 50/50 in stocks/bonds at retirement. Again, these are general guidelines and should be evaluated in light of individual needs and circumstances. For example, someone who is risk-seeking, or say has a very secure job or a large pension, may want to take greater risks. Someone who is highly risk averse, is worried about employment stability or has no other savings or investments, may want to be more cautious.