Response to Market Volatility
March 4, 2020 — From the start of 2019 until February 19, US stock markets had a strong run. During that period, the S&P 500 index rose 35.4% and the NASDAQ rose an astounding 48.3%. However, risk is always present, and with the Dow Jones Industrial Average down 2,611 points or 8.8% in ten days, we are reminded of the different risks that investors face when investing in stocks.
The past weeks, the fall in global stock markets in reaction to fears over the spread of the coronavirus is a perfect example of systematic risk. This is the risk that an entire group of related assets, such as stocks, real estate, or bonds, will all fall in value at the same time, and not necessarily for any easily understood reason.
Systematic risk is why we recommend diversification of your assets, and why our Tier 1 Capital Appreciation, Income Focused, and Appreciation and Income Funds have diversified holdings. Experience shows that when systematic risk occurs, it can reverse just as suddenly, and an upward move can be just as abrupt as the downward one.
In an event like the current health crisis, some sectors of the economy, such as travel, are more exposed to adverse consequences than others. This is an example of industry or sector risk. Often, different sectors move in opposite directions, meaning that diversified portfolios will have lower volatility than highly concentrated ones.
Systematic risk is a fact of investing in equities. Since the great recession that ended in March, 2009, there have been 26 separate times that the broad market indexes have fallen at least 5%. That is an average of about twice a year. The recent fall is not unusual or unexpected. The underlying reasons for this particular sell-off may be varied, but the situation with the global spread of coronavirus is somewhat novel.
When markets are choppy, it's important to keep in mind the following:
- Corrections are a normal part of a market cycle—especially during the late stage that we are currently in. And yet, corrections create uncertainty for many investors causing them to make hasty decisions. Historical performance shows that the US stock market has been able to recover from declines and can still provide investors with positive long-term returns for those who have longer time horizons.
- Make sure you're comfortable with your investments. If market downturns make you uncomfortable, you may want to consider adjusting the risk level of your account, while understanding that more conservative investment strategies may limit the growth potential you need to achieve your retirement goals. And, even if your time horizon is long enough to justify an aggressive portfolio, you have to be able to tolerate the market ups and downs.
- Stay focused on your objectives. Retirement investing is for the long term and you need to balance expected long-term performance with a certain level of risk, not short-term market volatility. This is a good time to review your situation and your longer-term objectives: What are your retirement goals and how are you doing? What is your timeframe for meeting your goals? What is your tolerance for volatility or risk in your portfolio?
- Check that auto rebalancing is set for your account. Movements in the markets will change your mix of stocks (growth), bonds (income), and cash (capital preservation) from your intended asset allocation. The auto rebalancing feature ensures that your investments are periodically reset to your target asset allocation. To learn more about rebalancing, read our knowledge base article. We encourage you to speak with your financial advisor about your personal situation.
- If you want to change your investment allocations or check your rebalancing frequency, make sure you do so before March 24 at 4:00 p.m. There will be a blackout period from approximately mid-March to mid-April when you won't be able to view, change, or direct your 403(b) account's investments while we switch our recordkeeping service provider to Fidelity.