Navigating the Ups and Downs of the Market in Your 401K

For investors, a market pullback can be a painful thing—no one likes to see the value of their account go down. But every downturn brings investment opportunities. For one, while the investments you hold may be dropping in value, the investments you may want to buy could be getting cheaper. Here are a few strategies for plan participants to navigate down and up markets.

Key Takeaways:
• Stay disciplined by thinking long term and stick with a suitable portfolio strategy for your circumstances.
• Do not try to time the market. Moving in and out of the market is not a way to manage risks.
• Rebalancing from investments that outperformed into beaten-down types of investments can help you manage your portfolio's risk level and is a better way to manage investing risks.

For investors, a market pullback can be a painful thing—no one likes to see the value of their account go down. But every downturn brings investment opportunities. For one, while the investments you hold may be dropping in value, the investments you may want to buy could be getting cheaper. Here are a few strategies for plan participants to navigate down and up markets.

Stay Disciplined By Maintaining A Long-Term Perspective
Down markets do not last forever. Non-cyclical Bear markets last eleven months according to S&P Capital IQ. Investors who have followed their emotions, joining the crowd of other emotional investors, have historically regretted it. Periods that followed investors cashing out of the market have provided above-average returns, while periods that followed investors adding to the market have provided below-average returns. The typical rebound one year later from the trough in a bear market is 47% (S&P Capital IQ). Investors must be invested in stocks to recover lost value. Look beyond the Bear market. It is easier to be disciplined if you have the right portfolio for your circumstances.

The right portfolio helps you reach your goal and allows you to sleep at night. If the portfolio strategy you choose can drop in value beyond your “pain threshold” for losses causing you to panic sell in a down market, then it’s the wrong portfolio for you in the first place. Aspetuck Financial Management can help you invests in a suitable portfolio for your circumstances and goals. Secondly, stay balanced. That means your asset allocation should be about fifty percent in equities, and fifty percent in bonds. A balanced approach will lower to downside risks and let you benefit from the long-term growth of the stock market.

Do Not Try To Market Time
Some investors time the market to avoid market downturns and then find themselves investing again out of fear of missing out on stock market gains. History shows that in aggregate, many investors often buy into markets near peaks and sell near bottoms. For example, there were big inflows into stocks in 2000 and 2007, just before market peaks, and dramatic outflows in 2008 and 2009, right before the market took off. Again, last March, Investment Company Institute data shows that investors sold near or at bottom, and many never bought back in because of headline news about economy and coronavirus. Unfortunately, investors tend to chase performance, and panic sell. My advice is do not time the market. Instead be a long- term investor who ignores occasional down turns. Trying to avoid market down turns can be costly. For example, what happened when a hypothetical $100,000 investment in stocks missed the market’s top-performing days over the 20-year period from January 1, 2000 to December 31, 2019? The investor who missed just five of the top-performing days during that period would have accumulated only $214,950. The investor that did not sell and maintained a long-term perspective accumulated $324,019. Instead of trying to avoid down markets by jumping in and out, invest in a suitable portfolio for your circumstances and goal. Aspetuck Financial Management Investment Advisor can help you.

Rebalance To Manage Your Portfolios Risk
Consider rebalancing assuming you are comfortable with your portfolio strategy, check to see whether your asset mix may have veered off course due to the recent market pullback. If so, consider rebalancing to your target mix. Rebalancing into investments that have lost value during a down market means investors may invest at a lower price. An annual rebalance, in a year where the equity portion of your portfolio has declined, while bonds have risen in value, would rebalance bond assets into equity assets to target asset allocation that is designed to satisfy a particular risk and reward profile. In a year when equities declined, most investors would look backwards at the negative equity return, and buy more bonds selling at higher prices. Successful investing requires rebalancing into what is cheaper that will become more expensive going forward as economic conditions change. Aspetuck Financial Strategic Models will rebalance for you at least once each year, and the Tactical Models maybe more frequently depending on market conditions.

The Bottom Line
An Aspetuck Risk Managed Portfolio strategy is meant to work over the long term, so plan participants need to keep a short-term pullback in perspective. Markets will rise and markets will fall but tend to rise over long periods of time – most of the time markets are rising. To make the most of a bad market, consider rebalancing into investments that are underperforming from ones that have outperformed. Need help building a portfolio to make the most of volatile markets? Your Aspetuck Investment Advisor can help.

© 2018 by Aspetuck Financial Management LLC

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