As stock markets continue their record-setting ways, it’s important to remember, as Wall Street wisdom reminds: “Trees don’t grow to the sky.”
Volatility may be around the corner for the financial markets, which have grown feverishly since the election of President Donald J. Trump in November 2016 and continued through his inauguration and have continued into 2018.
By way of example, during 2017, all three major equity market indices — the Dow Jones industrial average, the S&P® 500 and the NASDAQ — set record highs more than 60 times. The S&P 500 climbed 21.83 percent, the Dow Jones industrial average climbed 28.11 percent and the NASDAQ climbed 29.64 percent.
“Volatility was incredibly muted in 2017,” said David S. Spika, CFA, chief strategic investment officer of GuideStone Financial Resources®. “There is a market precedent for volatility to soon increase. This period has been the longest period without a 5 percent correction in history. In fact, 5 percent pullbacks have occurred, on average, three times a year since 1928.”
Retirement plan participants should not see volatility as a reason to flee markets, but to ensure they remain focused on their long-term asset allocation.
“Volatility can alarm investors, but it’s prudent to stay calm in periods like this,” Spika said. “Back during the Brexit vote, when British voters elected to leave the European Union, those who stayed calm and didn’t overreact did fine. It’s always prudent to focus on long-term asset allocation and remain calm.”
Spika said active management firms, like GuideStone, are thought by many to be better suited for volatile markets, which create more disparity among stock prices, giving our sub-advisers a better chance to identify companies that are undervalued.
GuideStone President O.S. Hawkins echoed Spika’s thoughts.
“Market fluctuations will always occur, but long-term retirement investors must keep their eye focused on their goals and not short-term fluctuations,” Hawkins said. “Focus on diversification, your objectives and your time horizon, the time between now and when you need your money, and less on the day-to-day headlines and market swings.”
When dealing with a period of volatility, GuideStone believes investors should keep four principles in mind:
- Always focus on your long-term objectives, not your emotions. Specifically regarding retirement participants, these assets are to serve your needs for a long period of time. Make sure your objectives and actions are consistent with your time horizon.
- Avoid making impulsive decisions. “Guard against making ad-hoc or emotion-driven changes in your portfolio,” Hawkins said. “Making changes based on short-term market moves is almost a guarantee for failure as it promotes buying high and selling low.” The performance of your account moving forward will be determined based on results of the financial markets in the future, not the past. “Selling today cannot avoid yesterday’s market loss, and likewise, buying today does not capture yesterday’s performance,” Spika said.
- Don’t count losses (or gains). Consistent contributions to a retirement plan afford investors a systematic way of taking advantage of investment opportunities as markets ebb and flow.
- Maintain realistic expectations about market behavior. Financial markets in the short term tend to fluctuate in response to social, political and economic events. However, historically, the markets stabilize and return to profitability over the long term, focusing on the underlying fundamentals. “Historically, the markets have been favorable to those with a long-term view,” Hawkins said
“2018 may be choppy for investors, but long-term investors should focus on their long-term objectives and not on the minute-by-minute headlines scrolling by,” Spika said. “Even with higher volatility a possibility, we do not expect a bear market or a recession, just more volatility in the coming months.”
GuideStone participants can receive help with their long-term investment allocations by accessing the Investment Recommendation tool within MyGuideStone or by accessing the resources on the Retirement Planning and Guidance page.
Roy Hayhurst is director of denominational and public relations services for GuideStone Financial Resources of the Southern Baptist Convention®.
Director of Denominational and Public Relations Services
GuideStone Financial Resources of the Southern Baptist Convention
Roy.Hayhurst@GuideStone.org | (214) 720-2141