As I sit here putting this article together, U.S. equities have opened with gains, something the news headlines suggested was unlikely as I went to bed last night. China took steps to stabilize its currency, and that calmed nervous markets.
We tell investors they shouldn’t pay attention to the markets’ day-to-day movements. But it’s sometimes impossible to avoid—like when stocks fall 3% in a day, as they did Monday, August 5, a sixth straight day of losses. That’s why it’s so important that—whether you are overseeing a defined contribution (DC) plan, a defined benefit (DB) plan, or a nonprofit—either your organization or your plan’s participants remain committed to an asset allocation, even when markets might appear to be in a free fall.
Markets bounce back, whether their challenge is U.S.-China trade (as it has been recently), or Brexit, or simply the end of a business cycle.
Global economic challenges
No doubt, the global economy faces challenges. The U.S.-China trade dispute unsettles markets already coming to terms with economies nearing the end of their natural business cycles. The U.S. economy has grown for a decade; the European and Japanese economies for most of that period. While a global or major regional recession in the next 12 months isn’t our base case, we do expect global growth to soften, as we discussed in our recent midyear market and economic update.
As economies soften, you can expect more volatility, more headlines professing doom, and, perhaps, more signals from within to just do something. And you or your participants should indeed do something—but during a period of calm, not in a panic: Reevaluate your asset allocation.
Get comfortable with your allocation
Participants should remember that stocks offer investors of all ages an important means of growth in their portfolios. Older investors typically need less stock exposure and more fixed income exposure. Younger investors, who have more time to recover from any prolonged market downturn, can typically take on more stock risk. Of course, all investors are different, so individuals’ asset allocations will vary.
That said, all investors—DB plans, nonprofits, and DC plan participants—have largely been rewarded, especially in the United States, for their stock exposure during a decade of global growth. We advise all investors to periodically rebalance their assets so gains in stocks, for example, don’t leave a portfolio with a greater-than-desired stock exposure.
Periodic rebalancing also lets investors perform a gut check: Am I going to stick with this allocation if stocks fall by 10%? By 20%? Get comfortable with your allocation and you may be able to ward off any impulse to sell after markets have already fallen or buy after they’ve already risen.
You can’t control what happens half a world away while you sleep. But if you or your participants have an asset allocation that you can remain committed to, you’re very much in control.
- All investing is subject to risk, including the possible loss of the money you invest.
- Past performance is no guarantee of future returns. Investments in bond funds are subject to interest rate, credit, and inflation risk. Foreign investing involves additional risks, including currency fluctuations and political uncertainty. Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.