Investing for retirement is a long-term journey. Whether your retirement is 40 years away or right around the corner, it’s important to remember that retiring from your career is just the beginning. Your savings may need to last 20 to 30 years or longer.
Short-term market volatility is inevitable and to be expected. It is important to learn how to maintain your strategies for pursuing your retirement goals and not veer off course due to fluctuations in the market.
Before you react to fluctuations in the market, consider these investment basics:
Investment performance matters, but what matters most is making sure you are saving enough to reach your goals. How much you invest matters more than how you invest. Start early and contribute enough to make sure you can retire on your terms. Don’t abandon your savings plan based on market performance.
Save consistently. Contributing equal amounts on a regular basis, regardless of which way the markets move, can help reduce your overall average purchase price over time. This strategy is referred to as dollar-cost averaging. For the strategy to be effective, investors should consider their ability to continue investing during periods of falling prices.
Consider regularly rebalancing your portfolio. Reviewing your original asset allocation and rebalancing your assets can help to adjust for any recent market volatility. Getting back to your target mix, or rebalancing, sounds simple but often turns out to be psychologically difficult. That’s because it requires selling assets that have performed better for you and buying those that haven’t done as well. Consider setting up automatic rebalancing with your plan provider if you find your asset allocation is off course.
It’s tempting to want to take action when markets are volatile; however, that’s exactly when you shouldn’t act on emotion. Try to take a step back and gain perspective on your long-term goals and asset allocation. Don’t let the day-to-day market chatter send you off course. If your reasons for investing haven’t changed and you have a diversified portfolio of stocks, bonds, and cash investments, doing nothing may be best.
Diversification, asset allocation, and dollar-cost averaging do not ensure a profit or protect against a loss. Rebalancing may have tax consequences, which you should discuss with your tax advisor.