Volatility can make your stomach churn, and the volatility of an unstable stock market causes even the most savvy investors to reach for the Pepto-Bismol. So you may be surprised to hear stock market volatility can actually be a good thing — at least for your retirement savings.
Say you are investing $500 in a stock mutual fund in your 401(k) each month. If the market dips on payday, you are in luck. Why? Because you will get more shares for your money than you would if the market were moving up and share prices rising. It is like going shopping and finding everything you need on sale.
Remember you have a long-term investing horizon, and that in time, the market has a history of going up. Keep that perspective in mind when the market dips and you begin to worry about your money.
Here are some ways you can protect your retirement funds from market moves.
Stay alert at the wheel
It is a good idea to keep your eye on the economic indicators, those reports issued by the government and other organizations that take the temperature of the economy. When higher inflation and interest rates threaten, do not panic. But think about diversifying your assets so your portfolio continues to perform well. In sustained economic good times, stocks and bonds do well. Once you are well invested in those, you may consider expanding into such things as real estate investment trusts (REITs), which have traditionally been good hedges against inflation.
Keep your balance
Rebalance your retirement portfolio every once in a while, and remember that your goal is to make money. Sometimes that means you should take profits on an investment that has done well. Periodically readjust your allocation among stocks or funds to keep your portfolio in line with your ideal asset allocation. Changes in the market can cause one fund or stock to become too large a percentage of your holdings, which increases your risk. If the value of your large-cap stock fund is now 35 percent, while your bond fund has declined to 15 percent, rebalance by selling some stocks and buying more bonds. You’ll be selling high and buying low, the classic investment strategy.
Cut your tax bill
Keep more of your savings for yourself by reducing your taxable income through retirement savings. In addition to allowing you to accumulate wealth, your retirement plan allows you to shrink your tax bill. Invest as much as you can in your 401(k) or other employer plan, as well as in Roth IRAs and Keogh plans.
Greed is not good
Volatile stock markets are risky enough. Do not take further risks by getting greedy. Forget about pursuing hot stock tips or chasing the latest IPO. Your retirement accounts are not the place to take chances. They are the place for sustained, steady asset growth.
If you are already retired and living on your retirement assets, it is a good idea to move money out of stocks during volatile times. Keep enough money in savings accounts, certificates of deposit and short-term bond funds to meet your income needs for a year or longer. That way you will not be forced to sell stocks when the market is down. It is better to plan ahead so you can sit tight and ride out any market storms.