It’s no secret that the stock market has seen increased volatility in the last couple of months—partly due to the uncertainty surrounding the war in Ukraine and partly due to the continued effects of historically high levels of inflation.
In the last 6 months, all three indices experienced significant declines: the S&P 500 fell more than 20%, (1) the Nasdaq fell more than 29%, (2) and the Dow fell more than 14%. (3) Big tech stocks bore the brunt of the declines (4) as many experts wonder if the bubble surrounding this industry is about to pop.
In addition to the stock market decline, in response to surging inflation, the Federal Reserve raised interest rates by .25% in March and then by .50% in May, which marked the single largest rate hike since 2000 (5) and the first rate hike since December 2018, (6) as they say, records are made to be broken and June gave us a new taste of history with a .75% hike not seen since 1994. (7) Watch for more rate hikes to come. The Fed has promised to raise rates throughout the remainder of 2022.
Investors are understandably nervous about their investments and their purchasing power, and it’s likely your employees are worried about their retirement goals. Here’s how we will help you support them and help them keep a level head and avoid financial mistakes.
We Will Help Them Stay Calm
At times like these, it’s important to put current conditions into perspective. This is not the first time the market has taken a tumble and it won’t be the last. Declines in the Dow Jones Industrial Average are actually fairly regular events. In fact, drops of 10% or more happen about once a year on average: (8)
That doesn’t mean it’s comfortable to face downturns, but we are here to remind your plan participants that their target date funds are designed with volatility in mind and are built with gradually reducing risk as they draw closer to retirement.
We Will Support Them As They Ride Out the Uncertainty Storm
It’s important to remember that markets dislike uncertainty. With a global pandemic still raging on in some parts of the world, a war in Ukraine, an out-of-control housing market, and rampant inflation, things couldn’t get much more uncertain.
Uncertainty leads to volatility, and although the VIX (the market volatility index) has decreased slightly in the last few months, we’re still experiencing day-to-day fluctuations. (9)
We Will Teach Them to Play Dead
There’s an old saying that the best thing to do when you meet a bear market is the same as if you were to meet a bear in the woods: play dead. While easier said than done, successful long-term investors know that it’s important to stay calm during a market correction.
Market volatility has increased in recent years and the media can often make it seem like each episode is worse than the one before. In reality, volatility does not hurt investors, but selling when the market is down will lock in losses. You don’t want your employees’ savings to end up looking like this: (10)
We Will Remind Them That Their Portfolio Is Diversified
Fears about inflation, volatility, and market declines are stressful. However, it’s important to keep in mind that while the stock market is down, your employees’ portfolios are made up of both stocks, bonds, and other assets that are designed to work together to decrease overall losses. It’s important for them to consider their specific portfolio, investment horizon, and circumstances when reflecting on economic events.
We Will Help You Review Your Investment Lineup
Now is the time to stress test your target-date funds and make sure your investment lineup is well diversified. Plan sponsors have a significant responsibility to work with an advisor to select appropriate investments, replace poor performers, and verify that the fees are reasonable. As the market changes, make sure you are still following your investment policy statement and on track to provide strong outcomes and follow DOL guidelines regardless of what the market does.
Let Us Guide You With Your Plan
On a good market day, it’s a heavy responsibility to monitor your plan’s investment menu, support your plan participants, and stay in compliance with DOL regulations, let alone with the headaches today’s headlines bring. Outsourcing to a team of trusted fiduciaries may be the right next step. When you work with us at DCS Pensionmark, we actively select, monitor, and replace funds in your plan for you. We also serve as your dedicated plan consultant, helping you make the most informed decisions for your business and supporting your employees with their plan decisions and questions. Have your plan participants call us and we will remind them that their target date funds are designed with volatility in mind and are built with gradually reducing risk as they draw closer to retirement.
Dan Shapiro is a retirement plan advisor and holds the Accredited Investment Fiduciary® and Certified Plan Fiduciary Advisor certifications. With over 30 years of experience in the industry, Dan guides his clients through the entire retirement plan process, from plan design to compliance to investment oversight. His goal is to provide his plan sponsor clients with the ability to offer the right retirement plan the right way to their employees—a plan they can be proud of. He is one of the original 100 Accredited Investment Fiduciary® practitioners in the United States and uses his knowledge and experience to implement best fiduciary practices to ensure employees have appropriate investments to choose from and employers have a well-documented fiduciary process in place to mitigate risk. Dan is known for taking the time to understand his clients’ unique goals and situations and applying his holistic approach to customize and develop tailored strategies to improve outcomes and take some of the plan sponsor burden off their shoulders.
When he’s not working, you can find Dan at the park and marina near his house training his Australian Shepherd. He cherishes his frequent FaceTime calls with his grown children who live in Israel. In fact, Dan and his wife, Rita, consider their proudest life achievement to be raising their two children, Ashley and Joshua, to be productive and principled adults. Dan and Rita love to entertain, especially when it includes making great food with the smoker and barbeque. To learn more about Dan, connect with him on LinkedIn.
Pensionmark Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Pensionmark is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC).
(1) Google Finance. (2022, June 29). S&P 500 Index. https://www.google.com/finance/quote/.INX:INDEXSP?hl=en&window=6M
(2) Google Finance. (2022, June 29). Nasdaq Composite. https://www.google.com/finance/quote/.IXIC:INDEXNASDAQ?hl=en&window=6M
(3) Google Finance. (2022, June 29). Dow Jones Industrial Average. https://www.google.com/finance/quote/.DJI:INDEXDJX?hl=en&window=6M
(4) Mitra, M. (2022, May 31). Why tech stocks are doing especially poorly during the market selloff. https://money.com/why-are-tech-stocks-down-2022/
(5) The Wall Street Journal. (2022, May 6). Fed interest rates live updates: Powell raises a half percentage point. https://www.wsj.com/livecoverage/federal-reserve-meeting-inflation-rate-may-2022
(6) Cox, J. (2022, March 16). Federal Reserve approves first interest rate hike in more than three years, sees six more ahead. https://www.cnbc.com/2022/03/16/federal-reserve-meeting.html
(7) Cheung, B. (2022, June 15). Federal Reserve raises rates by 0.75%, most since 1994, amid effort to slow inflation. https://finance.yahoo.com/news/fed-fomc-monetary-policy-decision-june-2022-120337242.html
(8) Capital Group. (2022). What past stock market declines can teach us. https://www.capitalgroup.com/individual/planning/market-fluctuations/past-market-declines.html
(9) Macro Trends. (2022, June 27). VIX Volatility Index. https://www.macrotrends.net/2603/vix-volatility-index-historical-chart#:~:text=The%20VIX%20index%20measures%20the,June%2006%2C%202022%20is%2025.07.
(10) J.P. Morgan. (2021, Nov 23). Quick shot: stay invested through the good days and the bad. https://www.chase.com/personal/investments/learning-and-insights/article/tmt-november-twenty-three-twenty-one-daily