MERS of Michigan - Market Volatility

FOCUS On What You Can Control

When market alerts, political events and financial news dominate headlines and fill up newsfeeds, investors can feel compelled to take immediate action. As a result, you may get excited to buy when markets are up, then panic and sell when the markets are down. That's the opposite of what generally accepted best investment practices would have you do. Making drastic changes could lock in the effects/losses of the downturn, and it might take you much longer to recover those losses than if you had maintained your long-term focus.

While you can't control the markets, you can control how you react. It can be hard to watch significant drops in the market happen in such a short time period. If the market is causing you anxiety, it may be best to step back, take a brief time out and keep your long-term plan in mind.

In the graph below, you can see that historically, the market has bounced back relatively quickly after every significant downturn in the past.

(View as a pdf)

MAINTAIN Your Contributions

Sometimes the temptation is to reduce or eliminate any voluntary contributions until the market normalizes. However, contributions going into your retirement account have the most effective buying power when the markets have dropped. For example, if your $100 contribution usually buys 10 shares priced at $10 each, it will be able to buy 20 shares if the shares are priced at $5. Short-term drops can be opportunities for your contributions to be more effective, but only if you continue to make them.

Check out our video on managing and monitoring investments in the accumulation phase for more information on the importance of maintaining contributions.

(Video Link - Managing and Monitoring Investments in the Accumulation Phase)

FORECAST Your Risk Tolerance

For long-term investors, the market volatility risk lessens because you can typically ride out the lows of the market. Therefore, the longer you have to invest, the more risk you may be comfortable with. Time is only one consideration when you assess your risk tolerance. Your own comfort level is also important. If your investments are in asset classes that tend to fluctuate widely, you must be willing to accept that the value of your investments may drop significantly from time to time. Conversely, if you have invested conservatively, you must accept the possibility that your returns will not keep up with inflation in the years ahead.

Investments Blog Articles

(MERS CentsAbility Blog)

DIVERSIFY Your Investments

A diversified portfolio is also a generally accepted best investment practice, which means spreading your money across many kinds of investments to help manage volatility.

Diversification goes beyond the general asset classes of stocks and bonds. These can be split further into more specific sub-asset classes to take advantage of different parts and behaviors of the investment markets. Using multiple asset classes can help you maintain a more consistent return.

Not sure where to start? An age-appropriate MERS LifePath may be a good option for you. LifePath funds come in a single package but actually each fund is highly diversified among asset classes to help you put your money to work more effectively toward your retirement goals. Each fund is named for a “target date”—the approximate year you expect to retire at age 65. Funds furthest from their target dates emphasize growth potential by putting most of your money in stocks. As you move closer to—and into—retirement, the funds automatically adjust (rebalance) to a more conservative mix. The funds automatically rebalance to the target allocation as well. The only thing you need to do is make sure the fund meets your risk tolerance. If it doesn’t, you can simply choose a fund with a different year and risk tolerance.

Graph Retirement Strategies

Good news! LifePath target date funds are the default fund for the MERS Defined Contribution Plan, 457 Program, and Health Care Savings Program so, unless you’ve made an investment change, it’s likely that your money is already invested in the fund that most closely aligns with your retirement date. You can always review and change your investments through your myMERS account.

LifePath Target Date Funds

Periodic Table of Investment Returns

LifePath Target Date Funds explained (video) (Runtime: 1:59)