Stay the course: How to handle market volatility

For investors, a market pullback can be a painful thing. No one likes to see the value of their account go down. The good news: If you have a long time to stay invested, and you are invested in a diversified asset mix that reflects your time horizon, financial situation, and risk tolerance, you can ride it out. But ignoring the stock market noise and sticking with your investments isn’t easy. The human brain is hardwired to be wary of uncertainty. While that might have helped in the past, it’s a risky instinct for investors.

If you are a long‐term investor with a solid plan, your best strategy is likely to stay the course.

Here are four strategies that may help you stick with your retirement savings plan.

1. Keep saving and investing.

Some investors have a tendency to try to time the market in an attempt to avoid downturns and capture gains—but most are not very successful. 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 (see chart).

Investors tend to chase performance and catch downturns

Instead of trying to jump in and out of the market, you can reality-check your investment mix to be sure it is still right for your goals and risk tolerance. If that's the case, it makes sense to continue to make contributions to your UC 403(b), 457(b) and/or DC Plan. Making these regular, equal investments over time is known as “systematic investing.”

There could be an advantage with this approach: You could end up with a lower cost per share, on average, than if you had invested larger amounts less frequently. (See how to put the law of averages to work for your investments.)

Keep in mind systematic investing does not ensure a profit or guarantee against a loss in a declining market. But it could help you prepare for tomorrow while sleeping more soundly tonight.

2. Remember that time is on your side.

What's the “secret sauce” in long‐term investing for a long-term goal like retirement? Time. Over the long term, even historic downturns can look like blips. 

In fact, over the past 35 years, the market has experienced an average drop of 14% from high to low during each year, but still managed gains in 80% of calendar years.* 

The takeaway is that over time, the market has gone up most of the time over the long term—just not in a straight line.

Growth of $100 over 50 years

3. Don't become obsessed with checking balances during times of volatility.

Doesn't it feel good when you check your account and see that it's up? Peeking into your account after a drop doesn't. Short circuit your impulse to flee stocks by not checking your investment as often during periods when the market falls.

Until you actually sell your investments, any gains or losses are just on paper. If you do sell, you’ve effectively locked in those losses. Selling investments may also cost money, in the form of trading commissions or redemption fees—but those costs are small potatoes compared with the opportunity cost of being out of the market. So, stick with your plan and stay invested. You'll probably be better off in the long run.

4. Consider rebalancing.

Assuming you're comfortable with your investment plan, 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.

Consider a quick example. Say Amy (a hypothetical investor) rebalances annually. Imagine that this year, the stock portion of her portfolio has declined, while bonds produced smaller losses. Her instinct may be to buy more bonds and avoid buying the losers, but buying the losers is precisely what rebalancing means—buying more stocks, either by reallocating her investments or putting new money to work.

Like systematic investing, rebalancing can help an investor buy low—when investments are effectively on sale. Over time, that discipline can pay off.

The bottom line

Markets will rise and markets will fall, and with the changes, opportunities will appear. To make the most of a bad market, consider taking advantage of lower-cost investments through a disciplined strategy. Once you're on the other side of the volatility, chances are you'll be really happy that you stuck with your plan.

Have questions? Meet with a Retirement Planner to review your investing strategy. You can meet by phone, via video conference, or in person.

*UPDATE: All in-person appointments are currently being conducted by phone or video only.*