When the stock market sells off, as it did in late July and early August, there is an inevitable surge in commentary on the riskiness of U.S. retirement accounts. The main worry is that retirement investors are taking on too much risk and that retirement assets should be invested in “safer” securities or programs.
From my perspective, many such criticisms seem unduly focused on the short run.
I have to admit, I can’t live without my smart phone. The ability to be constantly connected to my friends, take care of e-mails in between other tasks, or check the news from anywhere is an incredible convenience. It’s also led me to open random apps almost compulsively throughout the day.
I mean, clearly, everyone needs to know the weather in five random locations each hour, right? And I’m not alone. My generation is addicted to our devices.
Given all the market volatility, a lot of folks are wondering about whether now might be the right time to rebalance their portfolio.
Vanguard researchers present an in-depth discussion of rebalancing in this paper. This analysis emphasizes that historically, rebalancing once or twice a year—and only doing so when a portfolio had wandered from its asset-allocation target by at least 5%—produced absolute return/risk results quite close to those resulting from more frequent, complicated, and time-consuming rebalancing efforts. The “take away” is that when it comes to rebalancing, doing it once or twice a year can be useful—and for many investors, there’s little point in making it more complicated than that.
I’ve been investing in stocks through mutual funds for more than 30 years. I’ve known all along that periodic swoons come with the territory. I’ve experienced the October 1987 crash, the 2000–2002 bursting of the tech-stock bubble, and the kerflop of stocks accompanying the 2007–2009 credit crisis and “Great Recession.”
Even so, it’s never easy to see a fall in stocks slice into one’s retirement portfolio. But if getting older has an upside, it’s that experience has taught me some coping mechanisms.
I read the headlines, same as you. Investors are panicking. During the drive in to work today, I listened to a radio business show. A correspondent talked about the flood of selling and the deep sense of fear in financial markets. Another expert spoke about investors cashing out and moving assets to the sidelines.
Yes, it is true that in volatile markets, there is more trading. And what is true in the markets is also true at Vanguard. In our 401(k) business, for example, the number of participants making a change in their portfolios, and the dollars they were moving, jumped five- or six-fold on the worst days for stocks. A similar pattern emerges in our retail business. These statistics are the source for headlines about shifting investor sentiment.
