The current U.S. and oversea economic situations are grim and the market is constantly fluctuating. Even level-headed investors are panicking and looking for quick financial fixes. However, it is important that everyone takes a step back to put the market movements in perspective. A drastic and sudden investment decision may give you short-term relief, but it can also jeopardize your long-term retirement goals.
So what does the latest economic news really mean for your 401(k)? Well, if you are investing for your retirement based on a strategy created for your unique situation, probably nothing too significant. Make sure you refrain from making hasty decisions out of fear and remain sensible by keeping the following things in mind:
1. First and foremost, establish a plan that aligns with your savings and investment goals and then stick with it.
If you have a well-thought out plan based on your financial goals, you will feel more comfortable committing to it through all market conditions. Choose your investments based on diversification and your risk tolerance. Accurately establishing your risk tolerance should keep you on track in down markets, and it should provide a guideline to keep your portfolio from getting too aggressive in up markets. It’s easy to panic when you think about your retirement savings in a down market, especially if your retirement date is right around the corner. If you’re invested based on a sound strategy that takes your investing personality into consideration, you’ll be less likely to react to the latest market news and more likely to stick to your plan.
2. There’s no such thing as the perfect investment.
Investors look to find the one investment that will protect them from the market’s volatility, while still providing growth opportunities. Focusing on finding that perfect investment will keep you from thinking about the bigger picture – building your nest egg. Also, you will become short-sighted by chasing after the next investment and miss out on two important wealth building strategies: compounding and dollar-cost averaging. Compounding works by adding growth onto past growth and dollar-cost averaging allows you to buy more shares when the market is down and fewer shares when the market is up, enabling you to smooth out the market’s fluctuations.
3. Rebalancing is crucial.
Rebalancing your portfolio is important, especially if you want your investments to keep up with the market’s ups and downs. Your original allocation may change because of the volatility and your assets may no longer line up with your original strategy. Moving your assets to fit your original portfolio should keep you well balanced and moving towards your goals. Diversification is important, but rebalancing your allocation two or more times a year should strengthen your investment strategy.
Every day the media announces another changing factor to the market, causing some investors to abandon their original plan out of fear. Avoid throwing away your retirement future for short-term satisfactions and instead, focus on the bigger economic picture and concentrate on building your retirement strategy to meet your needs.
Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.