The ‘Volatility’ Conversation

In an interview with PLANADVISER last August, Katherine Roy, chief retirement strategist at J.P. Morgan, suggested that the long streak of equity market gains retirement plan investors enjoyed heading into the early part of last year created a fair amount of overconfidence and complacency.

“It’s always important for people to understand the big picture of where we might be in a market cycle,” Roy said. Often, participants focus on what markets have done in the last several weeks or months, and they forget the basics of long-term investing and saving, she said.

According to Roy, and others, it is common to see participants get upset over a few bad market days or weeks and make an ill-timed trading decision. Bailing out of a falling market may feel like the correct decision, but over the past 20 years, Roy said, six of the best market days occurred within 10 days of the worst days.

Roy’s comments offer some helpful context when it comes to talking with investors about the recent drops in equity market prices in the U.S. and globally. While the older cohorts must seriously consider sequence of returns risk, younger cohorts should be encouraged to think about the benefits of volatility.

Simply put, Millennial investors can afford to assume significant risk, given their longer investment horizon. Those nearing retirement, Roy suggested, might have already de-risked, to protect their wealth during 2018. Those who have not de-risked and who have suffered losses, though, might be best served by sitting tight and waiting for a rebound before making big adjustments.

She encouraged participants to consider allocating a “cash cushion,” or emergency savings fund, when the opportunity next presents itself, also cautioning that now may not be a great time to create a cash cushion by selling equities, given that leading economists remain largely optimistic about market prospects for the near term.

“[But] if they have such a fund and they face volatility at the retirement date, they’re not going to be pulling as much money out of a declining market from a sequence of return risk perspective,” she explained.

Participants stuck in the middle—meaning a solid 10 to 15 years before retirement—should ask themselves if they are de-risking appropriately, taking into account their time left in the workforce and their expectations for longevity in retirement, she said. Ultimately, understanding the importance of regularly assessing risk tolerance strengthens retirement prospects, whether during a bull market, bear market or even periods of back-and-forth volatility.

Another expert to speak with PLANADVISER about market volatility last year was John Diehl, senior vice president of strategic markets for Hartford Funds. Like others, he warned investors that the middle of a bout of market volatility is, generally speaking, not going to be the best time to adjust their portfolio in a big way, especially if they will be turning wholesale away from risky assets.
As Diehl laid out, one of the hardest things for plan advisers and sponsors to do is to generate a long-term investment focus among participants.