The United Kingdom shocked the world – and the markets – on June 23rd when British voters made the momentous decision to leave the European Union (EU). In the decision to BREXIT, which is short for "British exit," 51.9 percent of British citizens voted to withdraw from the EU over the 48.1 percent to who voted to remain.
Global markets reacted to the decision with heightened volatility, which may continue throughout the UK's formal notice of its exit, and as it negotiates the withdrawal agreement and exit terms with the EU – a process that requires a minimum of two years to complete.
If the recent headlines have your retirement plan participants looking to you for reassurance, it's important to encourage them to take a long-term view through any potential market instability. Now is also a good time to remind them of time-tested practices like diversification and asset allocation. Rather than react to short-term headline news that could harm their long-term goals, participants can act now to help their retirement investments withstand times of heightened market volatility:
Don't panic. Selling investments when the market is at a low can lock in losses. Instead, investors who "keep calm and carry on" can ride out periods of market decline and volatility to give investments the opportunity to recover losses.
Remember diversification and asset allocation. The principles of diversification and asset allocation can help smooth out the bumps in a rocky stock market. You can suggest that participants revisit their retirement account's asset allocation at regular intervals to check that it is aligned with their current goals and tolerance for risk. Our personal investor profiler on page six of our Managing Risk brochure can help. Participants who use a target date fund for their entire account allocation may not need to take this step since these funds are allocated and rebalance according to a target retirement date.
Stick with long-term investing goals. Participants need to take the long-term view when saving for retirement. Remind them to stick with their long-term financial strategy and stay focused on their goal of attaining future financial and security – not on their current account balance and any potential losses. Even the most vulnerable participants – those who are ten years or less from retirement – should keep this in mind. Their retirement savings will likely need to support a retirement of 20 years or more – and be invested over that time. It's especially a good idea for these participants to confirm their account is diversified and allocated according to their current goals and risk tolerance.
Keep saving. A successful retirement outcome is the purpose of a 401(k) plan. Participants should stay focused on that goal and continue contributing towards it. Plus, those who invest regularly – including through market fluctuations – can gain through dollar cost averaging. This investment strategy buys a fixed dollar amount of a specific investment at regular intervals – typically monthly. More shares are purchased when prices are low and fewer shares are bought when prices are high.
While no one knows what will happen in the future, time-tested investing practices can help retirement plan participants through uncertain financial times. In addition, participants should consult their personal financial advisors and tax consultants for additional guidance. You can also distribute our brief brochure to help them understand these and other ways for Managing Risk.
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