Investing near retirement: Tips to consider when the Dow Jones gets you down

Photo of two men discussing investing near retirement and how market fluctuations shouldn't affect their retirement goals.

It was a great day until you switched on the news while making dinner. The newscaster seemed to be staring straight at you when she said the stock market had its worst day in more than a year.

Gulp.

Panic sets in. You think about your retirement savings. All your plans. Quitting your job is only a few years away, and now what?  What happened to my investments? Should I sell?

And that’s how easy it is for emotion to influence your financial decisions.

Human instincts can quickly turn financial decisions into emotional ones. Countering emotion in this area of your life isn’t easy. But it’s possible if you have a plan.

Here are a few ways to balance those reactions when it comes to your hard-earned retirement savings:

Stay calm and don’t lose sight of your long-term retirement goals.

The news is all about attention-grabbing headlines that change every day—every hour. And when they focus on financial markets, it can be easy for retirement savers to get overwhelmed by stories about market volatility.

“Keep thinking further ahead, not just what happened today or this week,” says Heather Winston, assistant director of financial advice and planning at Principal®. She suggests making clear retirement goals and setting a timeline to reach them.

If home prices fell suddenly, your first reaction probably isn’t to immediately sell your house and sleep in your car. That’s because you’re focused on your long-term need for a place to live. You can develop the same mentality for your retirement investments.

“A solid plan can help anchor your emotions and help keep you from making costly snap decisions,” Winston says.

Concentrating on the things you can control can help take your focus off the short term. For example, you can adjust how much you’re contributing to your retirement and the amount of risk you take.

Consider boosting your salary deferral contributions to your individual retirement account (IRA) or employer’s retirement plan (401(k) or 403(b)) each year. Even better, choose an automatic deferral increase option, if your employer offers it.

A solid plan can help anchor your emotions and help keep you from making costly snap decisions.”

Heather Winston, assistant director of financial advice and planning

Don’t forget about the gains—yours and the market’s.

“It’s normal to worry about investment losses,” Winston says, “but, don’t forget about the gains you’ve made over the years.”

Some studies (PDF) suggest that the emotional pain of a loss is twice as powerful as the feeling of capturing a gain.1 Your brain is going to try to get you to avoid that pain. When it comes to your retirement investments, this tendency could lead you to accept lower return potential—and lower growth of your money—as you try to avoid further pain by moving to less risky investment options after a loss.

“When markets go down, people look at their investment statements and don’t like the numbers,” Winston says. “That’s a normal reaction. But changing your investments because of what you see on a statement isn’t necessarily rational. Sadly, no one has a crystal ball to perfectly time the decision of when to buy and sell.”

Again, focus on what you can control. You may decide on a mix of investments that matches your tolerance for risk. Then set a plan to rebalance. Review your investment choices periodically to make necessary adjustments, but not so often that you get caught up in every little market flutter.

Sound like too much work? Another potential option is an investment strategy that handles the asset allocation and rebalancing for you. “A target date fund has a professional manager that picks investments from various asset classes with a particular target date in mind,” Winston says. “You can pick the investment option with a date closest to when you’d like to retire. The manager of the investment does the researching, investing, and rebalancing based on a predetermined strategy.” It should be noted that you can always select one of the other investments in the target date fund series if another mix of investments better aligns with your risk tolerance.

Keep your retirement investment options manageable.

When faced with a lot of investment options you could find yourself in the grip of what Winston calls “decision paralysis.” Some people may cope by opting for “safer,” lower-risk investments—but these investments often have lower potential returns as well.

“The safest choice may not always be your best option for long-term growth,” Winston says. With any decision on your mix of investments, there are trade-offs. An investment strategy with low-risk investments may mean you need to work for longer or spend less in retirement. Select the appropriate mix of investments for you and adapt your asset allocation plan based on your short- and long-term needs.

Winston suggests checking in at least annually or as significant life events occur.

Get help from a professional when you need it.

Volatile markets can make people nervous and uncertain about their decisions. That’s normal.

Keeping up on the news is good, but you know best your specific situation and how markets affect you. That’s where having a relationship with a financial advisor can help.

“Listening to the news for investment advice can be like diagnosing yourself with medical articles off of the internet—informative, but not particularly helpful,” Winston says. “If you want to know specifically how market moves are affecting you and your plans for retirement, you need some personalized information.”

A financial professional can help you put together a long-term plan. Or they can just talk you through issues if there’s something happening in the news that you don’t understand. “Many people feel better after talking through things with a trusted financial professional,” Winston says, “even if the conversation just validates what they already know.”

Listening to the news for investment advice can be like diagnosing yourself with medical articles off of the internet ...”

Heather Winston

What to do next?

  • Have a retirement account from your employer with service through Principal? Log in to principal.com to see if your mix of investments is on point. First time logging in? Get started.
  • Need a financial professional? They can help you put together a plan or talk about how markets are affecting your retirement. If you’d like to meet face to face, find one near you.

1 Kahneman, D. and Tversky, A. “Advances in prospect theory: Cumulative representation of uncertainty.” Journal of Risk and Uncertainty. 5(4): pages 297-323. 1992

About Target Date investment options:

Target date portfolios are managed toward a particular target date, or the approximate date the investor is expected to start withdrawing money from the portfolio. As each target date portfolio approaches its target date, the investment mix becomes more conservative by increasing exposure to generally more conservative investments and reducing exposure to typically more aggressive investments. Neither the principal nor the underlying assets of target date portfolios are guaranteed at any time, including the target date. Investment risk remains at all times. Asset allocation and diversification do not ensure a profit or protect against a loss. Be sure to see the relevant prospectus or offering document for full discussion of a target date investment option including determination of when the portfolio achieves its most conservative allocation. 

Important Information

Investing involves risk, including possible loss of principal.

Asset allocation and diversification does not ensure a profit or protect against a loss. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. These risks are magnified in emerging markets.

There is no guarantee that a target date investment will provide adequate income at or through retirement. Participants may also choose a portfolio with a target date that does not match the intended retirement date. Compare the different portfolios to see how the mix of investments might shift.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

The commentary represents the opinions of Principal Global Investors. It should not be considered investment advice. No forecast based on the opinions expressed can be guaranteed and may be subject to change without notice. No investment strategy, such as diversification, can guarantee profit or protect against loss.

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