Navigating Retirement Portfolios During Market Volatility

After a long and calm period of relatively strong returns, global equity markets gave way to a bout of volatility that was sparked by concerns of rising inflation, heightening valuations, and the Federal Reserve’s monetary policy earlier this year. Recently, the trade dispute between China and the United States has continued to roil the markets. The current turmoil has served as a reminder that market pullbacks are part of the normal investment environment and not a rare occurrence, and that a measured, long-term approach to investing is paramount for retirement plan investors.  While this can be disconcerting for retirement plan participants, there are some steps that investors can take to protect their retirement portfolios during these downturns. 

Stay the Course

Successful market timing is rarely done; therefore, making selling decisions during a market sell-off could be detrimental to account balances. Historically, the worst trading days in the market have been followed by the best trading days in the market. Missing out on even a few of the best market trading days can significantly damage long-term returns. While short-term losses can be painful to witness, staying fully invested and focusing on the long-term horizon is recommended.

Source: Federal Reserve Bank of St. Louis

Tune Out the Noise

When retirement plan investors allow their feelings to dictate (often poorly-timed) decisions they can pay a heavy cost. Common investor behaviors, such as selling stocks after an equity market downturn, have caused the average investor’s balance to lag significantly compared to broader markets. According to a Dalbar’s “Quantitative Analysis of Investor Behavior,” over a 20-year period, the average investor consistently underperformed the markets with returns at 2.3%, compared to 6.9% of a 60% equity and 40% fixed income portfolio (1). The study cited the primary cause for the underperformance as the psychological behaviors of the individual investors depicted by their large movements in and out of investments.  Retirement plan investors should stick to the long-term plan and avoid emotional biases such as reacting to media coverage of falling markets or checking account balances too frequently. 

Stay Diversified

Diversification is one of the most powerful tools for long-term investing, and market volatility reinforces the value of diversification.  A great way to protect a retirement portfolio is to have exposures to stocks, bonds and international markets in an asset allocation plan that aligns with risk tolerance and goals. Additionally, international exposure can provide access to markets that may be generating positive performance when others are falling. The chart below shows how bonds have delivered positive returns in the worst equity markets to help cushion the adverse impact for investors. 

Source: Morningstar Advisor as of 06.30.2018. Average monthly returns since January of 2000, and average of monthly returns when S&P 500 posted negative monthly return. Equities: S&P 500; Bonds: Bloomberg Barclays U.S. Agg Bond

Revisit Asset Allocation and Rebalance When Necessary

Staying the course does not necessarily mean that participants should do nothing to adjust their retirement plans over time.  A period of dramatic loss may be a good time to ensure that a portfolio’s asset allocation remains aligned within its target. For example, if the targeted allocation of a portfolio is 60% equities and 40% fixed income, a sharp decline in equity markets may lower the equity allocation of the portfolio below the desired 60%, and the equity allocation should therefore be raised to achieve the strategic weight of portfolio.  Target date funds (TDFs) can also help investors by providing automatic rebalancing over time.

Focus on the Fundamentals

Focusing on the fundamentals should be part of investing in any market environment, but especially during market turmoil.  When concerns over market volatility and its effects on a retirement portfolio arise, then a review of the investment strategy, focusing on managers with conservative tilts, should take place. Equity managers focusing on the downside risk of a portfolio look for blue chip companies that have stable earnings, higher recurring revenue, and longer consistent track records.  Usually, these companies do better in market sell-offs and therefore, the higher quality-oriented strategies protect better in such environments. Another approach is to focus on income-oriented strategies where income generated by an investment can offset come off the losses on the price depreciation. 

Cash is Not the Way to Go

While cash (i.e., money market funds, certificates of deposit) can be used as a small part of a portfolio to help dampen volatility, holding all of a retirement portfolio in cash can be detrimental over the long term. Due to the current low interest rate environment, savings in cash are losing value as they are not keeping up with inflation. As the chart below highlights, investing in cash-only securities has led to minimum investment growth that has not outpaced inflation. 

Source: Morningstar Advisor


In recent years, the world equity markets have demonstrated a very low level of volatility. However, the environment may be changing and volatility could be return to more normal levels. Since market volatility and downturns are a normal part of investing, most retirement plan participants will experience multiple episodes during their lifetimes. While this can be concerning for some, volatile markets often create a positive buying opportunity for investors with long-term horizons.  In environments such as these, prudent retirement plan sponsors should help educate their participants to focus on the long-term goals of their retirement portfolios.

(1) Dalbar: Quantitative Analysis of Investor Behavior

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

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